Using a guarantor to borrow more than 100% of your property’s value
It is possible to borrow up to 105% of a property’s value through some lenders, with the help of a guarantor. This has a number of benefits, including allowing you to buy a property without a deposit, and – as we explore later, can also save you from the cost of lender’s mortgage insurance (LMI) that can apply to more highly leveraged loans.
A guarantor is a person who provides additional security to a lender for a loan. They agree to become legally liable for repaying a debt if the borrower defaults on their repayments.
Not all lenders offer these types of loans, but several do. Guarantors are usually immediate family members, like parents or spouses. Some lenders even call them family pledge loans, rather than guarantor loans.
You might be wondering why you’d need to borrow more than 100% of your property’s value. It’s important to understand that when you buy a home or investment property, there can be up-front costs in addition to the purchase price, including:
- loan application and setup fees,
- stamp duty,
- building and pest inspections,
- conveyancing fees to legally transfer the ownership of the property to you,
- the total of your land and construction costs if you are building a new home,
- utility service connections (e.g. phone, gas, electricity and council water rates).
The benefits of a guarantor home loan
As we mentioned earlier, a guarantor home loan can help you avoid the cost of lender’s mortgage insurance (LMI). Many banks will require LMI on a standard home loan where the loan-to-value (LVR) ratio is less than 80%. An LVR is the amount of your loan expressed as a percentage of the value of your home.
However, with the added security of a guarantor, many lenders will offer their best available interest rates and not require LMI.
A guarantor loan can also help you to qualify for approval if you have:
- No, limited or poor credit history.
- No deposit.
Becoming a guarantor
A guarantor will often need to provide collateral (assets) as their security guarantee, such as real estate. If they are offering up their own home as security, they’ll need to either own it or have a significant amount of equity.
They will also usually need to pass the lender’s normal criteria to qualify as a guarantor.
Most lenders will also assess the income and expenses of the guarantor. However, others won’t, and will purely rely on the collateral security provided. In these circumstances, retirees can potentially become guarantors.
However, it needs to be remembered that the guarantor is legally liable for their security guarantee. Neither the borrower nor the guarantor should take out this type of loan lightly. It can result in relationship breakdowns in a worst-case scenario. It’s best to have an open and honest conversation about your respective rights and responsibilities before you enter into any commitment.
The extent of a guarantor’s liability
This depends on the lender’s criteria and the necessary security guarantee will be included in the terms and conditions of the loan agreement. The security guarantee doesn’t necessarily have to cover the borrower’s entire loan balance.
For example, depending on the credit history of the borrower, many lenders will only require a guarantee for the loan balance in excess of 80% of the property’s value.
A security guarantee can also be arranged to be removed if the terms and conditions of the loan are negotiated appropriately. For example, many lenders will allow a guarantor’s security to be removed when the LVR drops to below 80%. So, if the value of your home is $750,000, your LVR would drop to below 80% when you owe less than $600,000.
As always, keep in mind that a home loan is a long-term financial commitment. Whether you’re a borrower or guarantor, you should seek professional advice before you commit.