Family guarantor loans – good or bad?

Many first home buyers are struggling to raise the deposit required to buy a property

3When I first entered the industry nine years ago many lenders were allowing purchasers to borrow 100% of the property value plus fees.  While this was great for the home buyer, unfortunately many people started their housing journey with negative equity (ie their loan was worth more than their house).

Over time this reduced to more sensible levels and borrowers were required to demonstrate an ability to save 5% or more of a deposit to qualify for a loan. In 2008, as a result of the GFC, most lenders increased the minimum deposit requirement to 10%-15% of the property price.

As we speak many lenders still allow people to borrow with a 5% deposit but the rules and restrictions surrounding them are increasing.

What are the benefits of having a guarantor?

For the borrower it means that you can potentially buy a house without having a 5% deposit.

As part of the borrower’s loan is secured by the guarantor’s property, the risk to the bank is reduced.  This means that the lender does not need to charge Lenders Mortgage Insurance and the interest rates offered are generally cheaper.

These two things can potentially save thousands of dollars for the borrower.

Risks to the guarantor

On the flipside, while there is no need for the borrower to pay Lenders Mortgage Insurance it does pass the risk to the guarantor. Quite simply, if the borrower doesn’t pay the loan, the guarantor will ultimately be responsible for that debt.

If the guarantor is looking to buy other property, or lend against the equity in their home, it can also limit their options as part of their equity will be used by the borrower.

Before considering being a guarantor there are some key things that you should consider first. Ask lots of questions and do you own research.  A qualified mortgage broker can help by providing information in relation to the different lender policies so that you understand your obligations.

Obtain legal or financial advice

The majority of lenders require a guarantor to obtain legal and financial advice.   While this can be deemed as an inconvenience it should also be viewed as a good investment to make sure that you and the applicants understand your legal obligations.  If you choose not to obtain advice there are lenders that allow you to proceed on the basis that you understand your obligations.

Consider extra Insurance

While anyone with a loan should have a level of insurance, it is even more important when someone is borrowing with a guarantor.  This insurance could protect the borrower from financial hardship and the guarantor from being lumped with the loan.

Discuss an exit strategy

Ideally the guarantee will remain in place until such time as the borrower has achieved 20% capital growth or the applicant has paid down the loan by the guarantee amount.  As such in most cases, the guarantor should expect to be in place for three years or more. PL

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About peardrealestate

Peard Real Estate is an award winning network of boutique offices throughout Western Australia delivering innovative property solutions, services and results for home owners, landlords and investors.
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