In particular we focus on getting the loan structure right the first time, choosing which lenders to use in the right order (yes this is important) and finally getting our clients the best deal possible.
Guarantor loans
What is a guarantor loan?
A loan involving a guarantor is one where the loan required cannot be supported on it own by the borrowers. The support can be in the form of providing additional security for the proposed loan, a commitment to help with the ongoing repayments of the loan or both.
Can I borrow 100% if I have a guarantor?
If you have a family member or with some lenders even a friend who is willing to “go guarantor” for you the answer is YES! In fact it may even be possible to get up to a 110% loan to help cover the cost of stamp duty, other associated costs and in some cases even consolidate some minor personal debts.
Guarantor loans are often called family pledge loans, family guarantee loans or fast track loans, in fact just about every lender calls them something different!
If you are ready to see what guarantor loan options are available for your situation please go to our enquire online page.
How does a guarantor loan work?
There are two main types of guarantor loans. Guarantors can provide a security guarantee and or a servicing guarantee.
Security Guarantee:
A security guarantee is the most common form of guarantor loan. This type of loan uses a third party’s property (normally a family member’s) as additional security for a borrower’s loan. This type of loan would typically be used if the borrowers had an insufficient deposit to purchase a property on their own or wanted to avoid paying mortgage insurance by having a loan to value (LVR) of less than 80%. In these cases the borrower would have to be able to service the entire loan by themselves. For a security guarantee it is common for lenders to allow the guarantor to provide a limited guarantee for an amount sufficient to provide a 20% buffer on the loan amount rather than guaranteeing the entire loan. See below for examples of a full guarantee and a limited guarantee.
Servicing Guarantee:
A servicing guarantee can be used when a guarantor is willing to agree to provide help to the borrower with meeting their regular repayments. This type of guarantee is not commonly available and is only currently offered by one lender in Australia that we know of. Call us to discuss whether you qualify for a servicing guarantee. Most lenders suspended this policy at the introduction of the nationwide responsible lending laws which come into effect from the 1st of Jan 2011.
Below we have outlined three guarantor loan structures. The key point to remember is that the loan amount must be no more than 80% of the security offered to support it.
Security guarantee example:
John and Julie Smith are first home buyers. They have found a house they wish to buy for $500,000 (property A). They can service a loan of $500,000 or more but don’t have the required 5% deposit saved up to meet lenders deposit requirements. John’s parents are willing to “go guarantor” for them and they own their home outright which is worth about $1,000,000 (property B).
| Loan amount required: | $525,000 (purchase price + stamp duty and legal fees) |
| Security for the loan: | Property A (value $500,000) + |
| Property B (value $1,000,000 with full loan guarantee) | |
| Loan to value ratio (LVR): |
$525,000 = 35% |
Limited guarantee example:
John and Julie Smith are first home buyers. They have found a house they wish to buy for $500,000 (property A). They can service a loan of $500,000 or more but don’t have the required 5% deposit saved up to meet lenders deposit requirements. John’s parents are willing to “go guarantor” for them and they own their home outright which is worth about $1,000,000 (property B). Rather than guaranteeing the entire loan amount the parents are able to offer the lender a guarantee limited to the amount of equity in their property which is required to enable the loan to value ratio to be 80%. In this case it would equate to $156,250 as per the example below.
| Loan amount required: | $525,000 (purchase price + stamp duty and legal fees) |
| Security for the loan: | Property A (value $500,000) + |
| Property B (value $1,000,000 but guarantor provides a limited guarantee of $156,250) | |
| Loan to value ratio (LVR): |
$525,000 = 80% |
Security and servicing guarantee example:
John and Julie Smith are first home buyers. They have found a house they wish to buy for $500,000 (property A). They can’t quite service a loan of $500,000 in a lenders eyes and don’t have the required 5% deposit saved up to meet lenders deposit requirements. John graduates from medical school next year. Julie works full time and earns a good salary. John’s parents are willing to “go guarantor” for them and provide both security and servicing support. John’s parents own their home outright which is worth about $1,000,000 (property B).
| Loan amount required: | $525,000 (purchase price + stamp duty and legal fees) |
| Security for the loan: | Property A (value $500,000) + |
| Property B (value $1,000,000 with full loan guarantee) | |
| Loan to value ratio (LVR): |
$525,000 = 35% |
Want to get a better idea where you stand? Contact Mortgage Experts.
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