“Family is not an important thing… it is everything!” Michael J. Fox
For many young people, making the jump from renting to owning is a sound long-term investment. However, often initial excitement turns to discouragement as they discover they cannot meet a lender’s strict requirements for finance. This could be for several reasons, like lack of evidence of ability to save, or a limited deposit. However, did you know your family could help? In some instances, a Guarantor loan may be a way to meet a bank’s requirements. So, what is a Guarantor loan, and how does a work?
What is a guarantor loan?
A Guarantor loan is primarily designed for young people wishing to purchase their first home, using equity in another property to purchase – this is usually their parent’s home, but it can be another family member. Put simply, the lender grants the loan for the new purchase to the buyer, using the family home as collateral.
It can be useful in some of the following scenarios:
• It allows young people without means to achieve a lender’s strict lending requirements an opportunity to enter the property market.
• The home is usually able to be purchased with limited savings and saves the need for Lenders Mortgage Insurance – a massive saving.
• The lender lends up to 80% of the value of the property to be purchased, with the balance being supported by the equity in the parents (guarantor’s) property.
• Once the buyer has 20% of the equity in the home, they can apply to have the guarantor portion of the loan discharged.
Things to be aware of before getting a guarantor loan.
While this may sound like a massive life saver in terms of getting into the property market, there are some points to consider:
• The guarantor needs to have equity in their home and be in a reasonable financial position so as not to place undue risk on their asset/s.
• Should the buyer default on the loan, the property would be sold. If the sale of the property does not fully discharge the loan, the guarantor would be liable for the remaining loan payout.
• If the guarantor has an existing mortgage over their property, their incumbent financier is required to grant permission for the lender of the new property to take a mortgage over the existing property.
• Due to the multiple financiers involved and valuations required, Guarantor loans often take longer time to process and can cause delays on purchase. Extended time should be requested for finance clauses as a precaution.
• The guarantor will need to seek out independent legal advice regarding the loan documents and mortgage. They need to be made aware of and feel comfortable with the level of risk involved. This will also take time, and as such can cause delays.
Make sure your family will be ok!
The most important thing to consider is if anything goes pear-shaped (eg – job-loss, sickness etc), will the family members that are your guarantors still be ok? (financially and relationally). As the legendary Mr Fox said – Family is everything!
If you have any questions regarding Guarantor loans, or are just feeling unsure how to proceed, please reach out, we’d love to help you. Our team have over four decades of experience many young people escape the rent-cycle and achieve their dream of home ownership in Toowoomba. We’d love the opportunity to help you too!