A limited guarantee is a way to reduce the risks associated with being a guarantor while still being able to receive the full benefits of a guarantor loan.
With this arrangement, the guarantor only secures part of the borrower’s mortgage rather than the entire loan amount.
Sounds great but limited guarantees can be quite complicated as there are multiple people involved.
Can I still borrow 100%?
Yes! You’ll be able to borrow up to 100% LVR (Loan to Value Ratio) or 100% of the property value.
You may also qualify to receive other benefits, such as Lenders Mortgage Insurance (LMI) waivers.
How does it work?
In a standard guarantor loan, the guarantor provides their property as security for the entire mortgage. However, limited guarantees work quite differently.
As with a normal guarantor home loan, the guarantor will need to provide their property as additional security for the lender.
The difference, however, is that the guarantor is liable for only part of the borrower’s mortgage.
How is the limited guarantee calculated?
Generally, the size of the limited guarantee can be calculated with the help of the amount that you’re looking to borrow and the price of the property. It’s calculated as:
Value of the limited guarantee = (loan amount / 0.8) – property price
For example, if you’re borrowing 105% of the property value for a $500,000 property to cover additional costs like stamp duty, then the limited guarantee will be:
($525,000 / 0.8) – $500,000 = $156,250
Keep in mind that every bank has different ways to calculate the limited guarantee. You can also work out the size of the limited guarantee by using our Guarantor Loan Calculator.
Disclaimer: The above formula is to work out how much limited guarantee you’ll need to keep your total LVR at 80%. This is because any home loan over 80% LVR is considered risky and will require the borrower to pay a mortgage insurance fee (LMI).
What do lenders look for?
The guarantor needs to have sufficient equity in their property for the lender to approve the guarantor.
Also, it’s essential that their total debt, which is their current home loan plus the limited guarantee, should be less than 80% of the property value.
For example, if the value of the guarantor’s property is $350,000 then the total sum of their existing debts and the limited guarantee they’re offering should be no more than $280,000.
In some cases, the lender will allow the guarantor to take out a second mortgage if they have an existing debt on their property. You can use this as security for a guarantee.
Is it suitable for me?
Some lenders accept anyone as a guarantor to help you get approved for a mortgage with the help of a limited guarantee. This includes, close families or extended relatives and friends.
What are the benefits of a limited guarantee?
A limited guarantee lets you receive the same benefits of a guarantor home loan. These include:
- You can borrow 100% of the purchase price.
- You can avoid paying Lenders Mortgage Insurance.
- The liability of the guarantor is reduced.
- You won’t need to pay anything up front.
Tips for going guarantor
Before you decide to become a guarantor for someone, you need to consider:
- Your financial situation: Are you fully aware of your financial situation and that of the borrower you’re going guarantor for? The last thing that you would need is to pay off someone else’s mortgage.
- Your relationship with the borrower: The closer you are with the person you’re guaranteeing, the better chance you have of recovering your money if anything does happen.
- Your ability to make repayments: It’s essential to ensure that you can cover the costs of the monthly repayments before you commit to the loan. If you need outside help to cover these costs then you may need to reconsider your decision.
- The size of the loan: You can further reduce the risk exposure to your security by making sure that the loan doesn’t exceed more than 90% of the property value.
- Getting professional advice: It’s recommended that you speak with a professional to get independent legal and financial advice. This can help you understand how it will affect your financial situation.
If you’re still not sure about becoming someone’s guarantor then speak with one of our brokers who specialise in guarantor home loans. You can call them on 1300 889 743 or complete our free online assessment form and find out if going guarantor is right for you.
Limited guarantee FAQs
When can I release the limited guarantee?
Releasing the limited guarantee depends on the type of arrangement you have in place.
The limited guarantee is not in place for the entire loan term and can be removed after a certain percentage of the property value has been paid off.
Generally, the guarantee can be released at the request of the borrower or the guarantor. The guarantee can usually be removed somewhere between 2 and 5 years once the loan is set up.
However, this can vary significantly depending on the arrangement you have in place and the lender you apply with.
You can apply to remove the limited guarantee under the following conditions:
- You can afford to make the repayments without any assistance.
- The size of your loan is for less than 90% LVR (ideally, 80% or less).
- You’ve been making regular repayments for the last six months.
You may have to pay an LMI premium if you still owe more than 80% of the property value when you apply to release the guarantee.
What else do I need to consider?
You may need to consider some things before you opt for a limited guarantee. Lenders usually require you to provide a strong case before they can approve the limited guarantee loan. In particular:
- If you’re buying your first home: You may be required to provide a strong reason to why you’re buying a home with no deposit.
- If your guarantor already has a mortgage: Most lenders don’t allow a second mortgage as security for a guarantee due to the added risk.
- If you don’t have savings: Although most lenders don’t require a deposit, they may still ask you to show proof of genuine savings. You can use our Genuine Savings Calculator to get an idea of how your deposit (if you have any) will be viewed by the banks.
- If your guarantor is retired and / or over 65 years of age: Some lenders don’t accept guarantees from retired guarantors or those who’re not working.