Term Deposit As Security For A Loan
Did you know that a term deposit can be used instead of a property as security for a home loan?
A term deposit is basically a deposit that is held at a financial institution, such as banks, for a fixed term. By using a term deposit guarantee, you can still backup your loan even if you can’t find a suitable guarantor that can offer their property as security.
On top of this, you may be able to borrow up to 100% of the purchase price, whilst the guarantor is protected from any unnecessary risk.
What is a term deposit guarantee?
A term deposit guarantee, or cash guarantee, is an unusual type of guarantor loan where the guarantor provides cash instead of their property as security for the loan. This amount is security for the bank in the event that the borrower defaults.
It’s generally used by borrowers looking to borrow the full price of a property but who’re unable to find a guarantor that can offer their property as security.
The guarantor will need to put their funds into a term deposit with the bank that the borrower is using. The bank will hold onto this while continuing to roll it over until the guarantee is released.
Applying for a term deposit can be as simple as applying for a standard savings account in a bank. The term deposit lasts up to a fixed term, usually between one month to five years.
Can the guarantor withdraw their funds?
As a general rule, the funds from a term deposit guarantee cannot be withdrawn until the guarantee is legally released.
Once the guarantee has been released, the guarantor can withdraw their funds from the account, or can choose to keep the account open with that bank.
Who should apply?
This type of loan is an alternative for guarantors that don’t want to put their property up as security for a loan. It’s more suitable for guarantors that are financially well off and have sufficient money that can be used as a term deposit.
It’s essential that the guarantors are in a good financial situation before they decide to guarantee someone else’s home loan. This will ensure that the guarantor will be able to live comfortably even after they’ve deposited the funds.
Call us on 1300 889 743 or complete our free online assessment form to find out if a term deposit guarantor home loan is the suitable for you.
Why should I use a term deposit guarantee?
Generally, people want to avoid exposing their assets to risk. As such, most guarantors don’t want to risk their property when helping someone else buy a home, even if they are their son or daughter.
A few lenders now accept cash rather than property as security to tackle this problem. This allows the guarantor to use money instead of risking their property.
The guarantor can take advantage of this as their property remains secured from creditors even if the borrower is unable to make their loan repayments.
What are some other benefits of a term deposit guarantee?
The major benefits of a term deposit guarantee include:
- The liability of the guarantor is limited because, unlike a security guarantee, the guarantor’s assets aren’t exposed to risk.
- The term deposit stays in the guarantor’s name and the funds are accessible as soon as the guarantor is released.
- It’s an attractive option for both the borrower and the guarantor, as the guarantor can borrow the full price of the property while the guarantor isn’t exposed to much risk.
- Since the property isn’t part of the guarantee, the guarantor is free to do as they please with their property. For instance, they can sell or mortgage their property without affecting the guarantee.
Term deposit FAQs
Will I earn any interest?
Yes, the bank will pay you regular interest from the funds you have in your term deposit!
The only downside to this is that you can’t change banks. This means that you’ll have to accept whatever interest rate is provided by that bank when your term deposit rolls over.
Do I have to provide a deposit?
The guarantor is usually required to provide up to 25% of the purchase price as a deposit. Normally, this is enough to protect the lender from any risks that may be caused by the borrower failing to make the repayments.
For example, to buy a property worth $500,000 the guarantor needs to put $125,000 as a deposit to meet the lender’s criteria of a sufficient term deposit.
It’s recommended that you analyse your financial situation first before you stand as a guarantor for someone else’s loan.
If the loan has an existing security, can the guarantor sell it?
There are cases where there is an existing security guarantee in place and the guarantor wants to sell it.
In this situation, the guarantee can be moved from the guarantor’s property into a term deposit acquired from the proceeds of the sale.
This situation isn’t accepted by most lenders. However, some lenders may approve this if you can clearly justify your situation.
Are you in a similar situation?
Call us on 1300 889 743 or complete our free online assessment form to speak with one of our mortgage brokers and they can help you find the right solution for your situation.