If we can speak very generally for a second, over the past few years, the gap between Australian property prices and wage growth has widened dramatically, with the strain being felt particularly in Sydney and Melbourne. This has made things pretty difficult for first home buyers saving for a deposit, whilst also trying not to exist solely on instant Mi Goreng.
As a result, many home buyers are turning to family for help, by way of a guarantor loan. So, we thought we’d put it under the microscope, and give you everything you need to know (for both sides of the coin).
To put it really simply, a ‘guarantor’ is someone that ‘guarantees’ a loan, or portion of a loan, for someone else. A guarantor loan can come under many different names depending on the lender (i.e. a family guarantee, family pledge, parental guarantee) but the concept remains relatively similar.
In almost all cases, the guarantor will either be a parent or immediate family member of the borrower, and they will often use their own home as extra security for the new loan. Effectively, they will be required to hypothetically cover the difference in principle until the borrower can afford to take the reins themselves, or until they are called upon to repay the portion of the debt which the borrower could not cover themselves.
Sounding like a big commitment? It absolutely is! But unlike a co-borrower, a guarantor can eventually be released, and their responsibility for the loan stopped without the loan having to be paid out.
A guarantor will generally be required to use their own home (or the equity in their home loan) as extra security for the borrowers new loan, which basically means that the loan is secured by both the property being bought and the property owned by the guarantor.
In terms of benefits, this can help the borrower in either:
As far as the guarantee itself goes, this will more often than not only consist of a portion of the new loan, and once repayments have been made to this amount, or if the property value increases sufficiently to reduce the overall LVR below 80%, the guarantor can then be released from the loan.
For those struggling to satisfy the financial requirements of a property purchase in a strong market, a guarantor loan can help in a few ways:
By becoming a guarantor, you may mean the difference between the guarantee securing a property, and not. Which is an amazing gift! But is also a big commitment, that should be fully explored through the guidance of a professional before any steps are taken.
It isn’t as dire as you would think, and believe it or not, the banks will do their best to work with theborrower, in order to see the debt gets repaid. Calling on the guarantor, and subsequently, selling the guarantors property to pay any remaining debt, is an absolute worst-case scenario.
If the borrower was to find themselves unable to meet repayments on the proposed loan:
The bank will allow sufficient time for this to be resolved as long as the borrower maintains a dialogue with them. They will typically only pursue repossession as an option if parties are uncontactable or unwilling to work with them.
Naturally, guarantor loans are that little bit trickier than your average home loan (although, what is average these days?) and it’s also important to note that not all guarantor loans are created equal. Different lenders will have different criteria and terms, so it’s really important that you speak to a mortgage broker about what will be best for you and your personal circumstances.
However, when implemented responsibly a guarantor loan can be incredibly effective, and we’ve seen many instances where this type of loan has helped many young, first home buyers get over the property purchase line. It’s all about managing the risk and reward, particularly from the guarantor’s point of view.
At Pure Finance, we like to place a particular emphasis on the ‘exit plan’ which is, having a strategy in place that aims to release the guarantor from the loan as soon as possible. This can be achieved when:
Also, it’s recommended that both parties seek legal advice or have an agreement in place to ensure everyone is on the same page, and in some cases, the lender may stipulate this as a legal requirement for the approval of the loan.
Got some more questions about guarantor loans? Or perhaps, you just want to have a chat? We’re all ears!
Reach us here: 1300 664 603
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The preceding information is of a general nature and does not take into account personal financial situations and endeavours. You should obtain advice based on your individual circumstances before acting on the above information.