Around 60% of first home buyers get help from their parents, usually in the form of a guarantor home loan.
It’s a great way to get your foot into the property market if you have no deposit but when can you actually remove your parents as guarantors and what’s the process?
How long does a guarantor stay on a mortgage?
Usually, we find that guarantors stay anywhere from two to five years, depending on a couple of factors.
The first one is how quickly you pay down the loan, and the second one is how fast your property increases in value.
Keep in mind that the guarantee is not removed automatically and must be done through refinancing.
What are the criteria for removing the guarantee?
Most of the major lenders or specialist lenders have similar policies when it comes to guarantor loans.
You are eligible to remove the guarantee once you have achieved these general requirements:
- Your repayments in the last six months should be made on time.
- Your loan must be less than 90% LVR or 80% LVR (if you want to avoid LMI).
- Your credit history, income, employment, and other aspects of your situation must meet the lender’s policy.
- You can potentially save thousands by avoiding LMI.
- You may qualify for a lower interest rate.
- It’s a more straight-forward process with less paperwork.
- Other guarantees: Are your parents planning to support your siblings? In some cases, it’s possible to have multiple guarantees on one property.
- Buying an investment: If your parents plan to buy an investment property, they may not have sufficient equity with the guarantee. It depends on the loan structure.
- Expanding their business: If they have a business loan, this may be secured on their property, which means the guarantee can reduce their future borrowing power.
- Selling their property: What if they sell the property with the guarantee on it? Some of the sale funds can be held in a term deposit as security for the guarantee until another property is found.
Please note that the criteria may slightly differ between the lenders.
When is the best time to remove the guarantee?
The ideal time to remove the guarantee is when you owe less than 80% of the value of your property.
There are several reasons for this:
We usually only recommend that you remove the guarantee earlier if there’s a need to do so.
How much you owe matters
What matters most to the banks is your Loan to Value Ratio (LVR), which is the percentage of your remaining loan amount against the value of your property.
For example, if you originally borrowed $525,000 (which includes the associated costs of completing the purchase including stamp duty and conveyancer fees) on a $500,000 property then your LVR was 105%.
If you have since paid the loan down to $400,000 then your LVR is 80%.
Your LVR may, in fact, be even lower than this if your property has grown in value.
Nevertheless, once your LVR is at 80%, you can remove the guarantee and avoid Lenders Mortgage Insurance (LMI).
Some people are under the impression that the guarantee is automatically removed when you owe less than 80% of the property value. Unfortunately, this isn’t the case!
You need to apply for a loan guarantor release, otherwise it will stay in place for the life of the loan.
If you or your parents really want to, some lenders will actually allow you to remove the guarantee once your LVR is at 90%. However, you’ll have to pay an LMI premium.
Removing the guarantee at 90% LVR
You’ll need to internally refinance your mortgage.
If your bank isn’t offering you a competitive rate, it may be worthwhile to speak to us, and we’ll let you know which other lenders are available.
Keep in mind that different banks will value your home at different amounts. We can order an upfront valuation with more than one lender, which allows you to choose the lender with the highest valuation.
Removing the guarantee at 80% LVR
With most lenders, we can complete a valuation request, and they will remove the guarantee without changing the loan.
One lender that works in this way is St George Bank.
With other lenders like CBA, their guarantor loans are set up as two loan accounts. One at 80% LVR and the other for anything above that.
Because of this, you just need to pay off the loan account for the additional amount and you can leave the other remaining.
If your property has increased in value, you’ll need to increase your loan amount on the loan account in which you owe 80%.
If it’s all too complicated, don’t worry!
Just call us on 1300 889 743 or enquire online to discover how we can help.
Be aware of the guarantor’s future plans
Don’t forget that your parents or relatives have gone out on a limb for you to get into the property market.
Your obligation to them is to remove the guarantee as quickly as possible, realistically within 5 years.
Having a guarantee in place can stop your parents from fulfilling their future plans.
Being aware of their goals helps you to plan how soon you will remove the guarantee:
If you’re not sure what you should do, you can speak with one of our expert mortgage brokers by calling us on 1300 889 743.
You can also enquire online to find out how our credit specialists can help you.
What to do in tricky situations
Can my guarantor sell their home?
You should talk to us before they put their home on the market.
It’s possible for a portion of the sales proceeds (to limited a guarantee amount) to be transferred to a term deposit temporarily while they look for a new home.
However, there are several options depending on the nature of your situation, so please contact us to discuss what is right for you.
Can I sell my home?
Yes, you can sell your home.
However, you should be careful to ensure that the amount you owe plus any selling fees (estimate 3% of the sale price) are less than the price you sell your home for.
What if I don’t have enough equity?
There aren’t any ways around it if you don’t have enough equity to sell your property.
We’d recommend holding on until you have sufficient equity to remove the guarantee or put the property on the market.
What if I get divorced?
We can refinance your guarantor home loan to have you as the sole owner of your property and borrower on your home loan.
You can refinance your existing guarantee with a new guarantee as well.
If you’re required to pay out your spouse, and there’s sufficient equity, this payment can be funded by the new home loan.
Contact us on 1300 889 743 or enquire online and we’ll help you to remove your guarantee.