What Should I Know About Guarantor Loans?
Good news for current and prospective Brisbane homeowners: 2022 is looking like a continued period of growth for the Brisbane property market. At the same time, the world is coming out of a pandemic, and many people are not in the same financial position as before. What if people looking to be Brisbane first time home buyers can’t come up with the deposit on their mortgage, or face other mortgage challenges? This is when a guarantor loan can be a great option to explore with an experienced mortgage broker.
What is a Guarantor Home Loan?
Guarantor loans are offered by lenders who doubt the borrower’s ability to repay a mortgage or in cases where the borrower does not have enough for the deposit. A guarantor home loan is essentially a mortgage for which the borrower and their guarantor — a third party who agrees to pay back the loan if the borrower defaults or can no longer pay it — are liable. Through a guarantor loan, a borrower may be able to pay a smaller deposit and avoid having to pay for Lenders Mortgage Insurance (LMI).
The most common guarantor home loan arrangements are:
1. Security Guarantee
This type is most often used with first time homeowners who don’t have the deposit but have really good credit histories. The guarantor home loan is being secured not only by the property being bought but also by the guarantor’s own real property. If the guarantor already has a loan against their property, the lender usually takes a second mortgage as security.
2. Family Guarantee
As the name suggests, guarantors are usually family members — most often, parents. If the lender uses the guarantors’ property as extra security, as well as their income as proof that the borrower can afford the loan, it is also known as a Security and Income Guarantee.
3. Limited Guarantee
Not every guarantor is willing to secure the entire amount of the mortgage (called an unlimited guarantee). A limited guarantee reduces the guarantor’s liability in that the guarantor is only guaranteeing a portion of the loan.
What is a Guarantor?
Being someone’s guarantor comes with serious responsibilities since they will be liable for up to the full amount of the loan (depending on whether it is a limited guarantee and whether some payments have already been made) if the borrower can’t pay the balance owing. With the right advice from a professional mortgage broker, you can understand if this arrangement is right for you.
Who Can Be a Guarantor on a Mortgage?
Lenders may have additional requirements, but at a minimum, the guarantor should:
- Be a citizen or permanent resident of Australia
- Be between age 18 and 65 (while possible, few lenders allow seniors to be guarantors)
- Have a good (personal) credit rating
- Have equity in their property and/or a stable income
How Long Does a Guarantor Stay on a Mortgage?
On paper, the guarantor remains on the mortgage until it is discharged. The guarantee can be removed or modified through refinancing. Most guarantors agree to stay on the mortgage between 2 to 5 years, depending on how quickly the borrower is paying down the loan or how fast the property value increases. Most lenders allow removal of a guarantee if:
- Repayments in the past 6 months have been made on time.
- The borrower’s credit history, income, and other financial aspects meet the lender’s policy.
- The loan-to-value ratio (LVR) is less than 80% (to avoid having to pay for LMI).
Where to Get More Information About Guarantor Loans Australia
At North Brisbane Home Loans, we are happy to answer your questions about mortgages and owning property in Brisbane. Contact us today to find out your options.
