What factors do I need to consider before providing a guarantee?

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Medley
Posts: 15
Joined: Tue Mar 27, 2018 1:52 pm

What factors do I need to consider before providing a guarantee?

Postby Medley » Mon Jun 11, 2018 12:43 pm

Hi Home Loan Experts.

My son is purchasing his first home with his girlfriend. He doesn’t have much savings and has asked me to provide a guarantee. He is not wise with his finances, but even knowing that I couldn’t turn down his request. So, I wanted to know what are the benefits for him with a guarantor loan and what should I be taking care of before giving a guarantee to them?

PS: I live in Highgate Hill. The value would be approx. $600,000 and I owe $200,000 to St George on my mortgage.

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Otto Dargan
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Location: Sydney, Australia
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Re: What factors do I need to consider before providing a guarantee?

Postby Otto Dargan » Mon Jun 11, 2018 2:02 pm

Hi Medley. Welcome to the forums.

Guarantor home loans are now the only way to borrow between 100% and 110% of the purchase price of a property. It will allow your son and his partner to buy a property now instead of having to save to buy the property. Also they would have to potentially miss out on their dream home and watch as the value of the property increases over time, getting further out of reach.

They could have following benefits:
  • Your child doesn’t need a deposit to buy a home: They’ll usually need 5-10% of the purchase price to buy a home. So for a $600,000 property, they wouldn’t need to save $30,000-$60,000 as a deposit if you were able to act as guarantor.
  • Your child can save money by not paying to pay Lenders Mortgage Insurance (LMI): If they were to borrow 95% on a $600,000 property, they would pay as much as$28,591 in LMI (LMI rates vary from lender to lender).
  • They could get discounted interest rates as they’re available from some lenders.
  • They can consolidate some minor debts, such as credit cards, into the home loan, essentially allowing them to borrow up to 107-110% of the property value.

A guarantor loan acts as a safeguard and a vehicle for getting your son into the property market sooner. However, a home loan is not a debt to be taken on lightly although it’s a limited guarantee on your part.

Acting as a guarantor is a big decision, so it’s recommended that you and your child seek independent financial advice.

Please enquire online or call us on 1300 889 743 and learn about it more.

Cheers,
Otto Dargan
Mortgage Broker
P | 1300 889 743
Home Loan Experts

Medley
Posts: 15
Joined: Tue Mar 27, 2018 1:52 pm

Re: What factors do I need to consider before providing a guarantee?

Postby Medley » Mon Jun 11, 2018 3:28 pm

Yeah, you’re right. I’ll seek financial advice and ask my son as well. Additionally, you mentioned a limited guarantee. What is that exactly and how does it work?

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Otto Dargan
Mortgage Specialist
Posts: 7021
Joined: Sat Sep 06, 2008 5:55 pm
Location: Sydney, Australia
Contact:

Re: What factors do I need to consider before providing a guarantee?

Postby Otto Dargan » Mon Jun 11, 2018 7:57 pm

Hi Medley,

For the majority of guarantor loans, lenders limit the guarantee secured on the guarantor’s property. It means they are not liable for the entire amount of the loan, but only a portion of it.

The size of the limited guarantee is calculated as follows: Size of the limited guarantee = (Loan Amount / 0.8) - Purchase Price).

For example, if you are buying a property for $600,000 and are borrowing $630,000 to cover the cost of the property plus the other purchase costs such as stamp duty and conveyancing fees, then your limited guarantee would be:

(Loan Amount $630,000 / 0.8) - Purchase Price $600,000) = $187,500 .

This implies that you’ll be liable for only $187,500 even if your child defaults on their home loan.

A rising property market means increased equity for your son to more quickly remove the guarantee or for you to leverage the equity in your own in the event that your son defaults.

To explain the first point, parental guarantors can actually remove the limited guarantee once the son or daughter owes 80% of the property value or less on their mortgage.

Some lenders will actually allow you to remove that guarantee if your son owes 90% or less!

Is this all too complicated? Just let our guarantor loan calculator figure it all out for you.

Remember, there are other no deposit home loan options out there that may work better for you and your child if you’re not comfortable with giving a guarantee.

We’re specialists in guarantor home loans. Please contact us on 1300 889 743 or enquire online and we can help you in the best possible way!

Cheers,
Otto Dargan
Mortgage Broker
P | 1300 889 743
Home Loan Experts

Medley
Posts: 15
Joined: Tue Mar 27, 2018 1:52 pm

Re: What factors do I need to consider before providing a guarantee?

Postby Medley » Mon Jun 11, 2018 8:33 pm

Thanks for the replies. I’ll try the calculator and speak with my son and give you guys a call in the coming week.


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