It’s not all about you – guarantor home loan
When asking your family to guarantee your home loan you may be asking them to take a lot more responsibility that you realise. If you take time and care to find the best guarantor home loan arrangement you can still have a competitive home loan with peace of mind for your guarantor.
Of course ideally you want a loan that has a competitive interest rate, reasonable or no fees and flexible options….but you should also be looking for a loan that doesn’t tie your guarantor up with unreasonable risk and exposure.
Important to consider what could possibly go wrong?
Things go wrong in life, unexpected things, just take a walk around the emergency department. If you get the wrong guarantee your guarantor could be up for all of your debt, rather than just the small portion you actually need from them. In the worst case this could mean they have to use their hard earned superannuation. Or they could be paying off your loan well into their retirement that may have implications for the pension eligibility. If they can’t afford to pay your loan they could lose their own home. But there are other implications – a bad guarantee may mean your parents can’t downsize or borrow to buy a holiday home. In fact they may not be able to buy a motor home as the guarantee may erode their ability to borrow even a small amount. It doesn’t have to be like that.
So what makes a good guarantor home loan?
- The guaranteed amount is limited to only the minimum required – rather than the full loan amount
- The guarantor is not required to demonstrate that they can repay the loan – important for retirees or self employed guarantors
- The lender accepts a 2nd mortgage for the guarantee – avoid having to refinance their existing mortgage to your new lender
There are a number of good reasons for using a guarantor:
- You want to avoid paying expensive LMI (lenders mortgage insurance)
- You don’t have the required 5% in acceptable genuine savings.
- Even with a deposit other costs like stamp duty and legal fees means there just isn’t enough money left to get you into your new home.
Arranging a good loan with a guarantor is a complex task and you really must have professional advice – anyone who tells you otherwise lacks experience. You, your partner and your parents all have different needs and so you want a product that is going to be the best solution for all concerned. Bank employees and some brokers only offer one solution where as we have maybe a dozen or more to choose from.
Not all lenders accept guarantors and some lenders offer guarantees that are outrageously bad for your parent.
It is vitally important that your parents realise the legal implications of being a guarantor and in fact most lenders insist that they obtain independent legal and financial advice. But before they call the lawyer please don’t hesitate to have your parents talk to Andrew, our Head Broker at Peach and a parent with personal experience as a guarantor he really understands all sides of this discussion.
If you think a guarantee is no big deal then think again
While you may be confident that your parents will agree this is not something to be treated lightly. Especially where the security offered is your parents home – lenders do not want to be dragged through the courts and the media. So they will go to great lengths to ensure that your parents are making an informed decision and if there is the slightest doubt, the application will be turned down.
Offering a guarantee to help your children can be a richly rewarding experience … or the start of a nightmare – get it right with our help
Most of the other hurdles that are placed in the path of first home buyers are imposed by the lender’s mortgage insurers eg: genuine savings 5% (LMI). By using your parents property as additional security the total value offered as security increases and so LMI is taken out of the equation. This then allows you to borrow virtually the entire loan amount and potentially even the stamp duty – it is a good outcome when done properly.
What are the other implications of guaranteeing a home loan
Our Head Broker, Andrew Hunter recently guaranteed his own son’s home loan and he has written an interesting article on some of the unexpected aspects of being a guarantor that affected him. His advice to parents considering a guarantee is that they should speak to a mortgage broker to get advice on what will be the best home loan for them. It is all good and well for your kids to find a great loan with a low interest rate but if it comes with lousy conditions for the guarantor then you are within your rights to say – no. If your kids don’t appreciate this then it is possible that they don’t really appreciate the commitment that they are asking you to make. After all there are some very competitive, full featured home loans that offer the type of guarantee options that Mum & Dad will appreciate.
With a guaranteed loan there will be additional legal and document fees ( maybe a second mortgage on parents property) involved with a loan guarantee – these fees can normally be capitalised into the loan. The guarantor will almost certainly be required to seek legal and possibly financial advice ( many lenders ask for proof). Most lenders will want to see income sufficient to service the guarantee amount. Although some lenders are waiving this requirement which can be very important if Mum & Dad are at or near retirement. Most lenders will want as a minimum an asset and liability statement. Many lenders will also want a first mortgage on parents home and this means that if they have an existing mortgage they also have to go through the trouble and expense of a refinance, however again there are some lenders who are happy to take a second mortgage behind an existing lender. This will still cost around $750 but saves a lot of hassle.
Limited guarantee or unlimited guarantee
This is a very important point of difference. Lenders who take an unlimited guarantee are making your parents responsible for the full loan amount, these are common but should be avoided. A limited guarantee is for a fixed nominated amount, usually the amount required to bring the loan below LMI but maybe less and it is your guarantor’s choice.
How long does the guarantee last for and can I cancel
The guarantee will remain in place until you apply to have it removed. However if you were to cancel your guarantee soon after settlement the lender would have to find LMI (lenders mortgage insurance) and the borrowers would have to cough up the LMI premium. If for some reason the LMI is not obtainable then in this case the lender may refuse to release the guarantee . If you wait a year or two hopefully the house will have appreciated and the loan principal will have reduced so that the lender should have no trouble finding LMI if required – you still have to cough up the premium but it will be lower as the LVR reduces. After a few a years as capital growth and principal repayments make a serious impact on the LVR and this drops to 80 percent you can apply to have the guarantee cancelled. Releasing a guarantee will normally require a new valuation at borrowers cost and the discharge of the guarantor’s mortgage.
In summary for parents
Being the guarantor for your children’s home can be a satisfying experience as you are not only saving them many thousands of dollars but possibly allowing them the opportunity to get into their own home at a time they would not otherwise be able to consider doing so. Despite the current affairs shock reports in our experience very few guarantees go wrong and we have never had a parent lose their home… after all it is not a good look for lenders. I would venture to say that many of the guarantees that go bad come from parents who are too eagerly encouraging young people into commitments that they are not ready for – we do see this quite often. If the borrowers are in secure and stable employment, if their savings plus rental payments are not too different from what their loan repayments will be then the risk to the guarantor may be small – but you know your own kids best. Don’t be rail-roaded into something that you are uncomfortable with and please speak to a mortgage broker experienced in this area rather than just accepting the advice of someone who is keen to get their commission for a loan and no interest in your needs.
Note: It has come to our attention that there can be implications with regards to pension entitlements where a guarantee is called on by the lender ( borrower defaults on loan). We strongly urge you to seek independent financial advice on this and all other implications of a guarantee.