30 Nov 2023 Podcast: Deep Dive – Guarantor Home Loans to Help Buy Property

Posted at 10:18h in Podcast by Evelyn Clark

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In this episode, we take a comprehensive look at the world of guarantor loans.

We explore how guarantor loans can be a game-changer for aspiring homeowners (or investors!).

Guarantor loans are perfect for someone who has a smaller deposit, but a strong borrowing capacity.

Some of the benefits include:

Less savings required
Lower interest rates
Avoid lenders mortgage insurance

From understanding the benefits and potential risks to practical tips for both borrowers and guarantors, join us as we unravel the complexities and demystify the process of utilising guarantors to secure that dream home.

Whether you’re a first-time buyer or exploring alternative financing options, this deep dive into guarantor loans will equip you with the knowledge to make informed decisions on your homeownership journey.

Tune in now!

Find out your next step in property finance:

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https://www.everlend.com.au/

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Podcast Audio Transcript

Welcome back to another episode of You Have My Interest, the show that helps you make smart moves with your money by giving you tips, tricks, and tools to help navigate your wealth journey.

I’m your host Evelyn Clarke, Director and Finance. Broker at Everland. Before we begin, we would like to acknowledge the traditional owners of the land from which we are recording a new are listening today.

0:22

We power respects to their elders.

Past, present and emerging always was and always will be Aboriginal land.

Hello everybody and welcome back to today’s episode of You Have My Interest, which is a deep dive into guarantor lending.

0:38

I’m very, very excited to talk about this topic because it’s something that used to be really common when we were assisting a lot of first home buyers to get into the market.

But now that we have a lot of these government schemes and concessions and also government grants available, we don’t tend to see as many guarantor loans.

0:56

Interestingly, in the last couple of weeks or so, I’ve started to see the inquiries pick back up for Guarantor.

Ending.

So I think it’s a really, really worthwhile topic talking about.

We’re going to go into some of the intricacies of how it is calculated and how it can save you things like lenders, mortgage insurance, who are eligible guarantors and what it actually means to be a guarantor and how it all works.

1:20

So without further ado, let’s jump into the episode.

So let’s start off by going through who is a guarantor and what is a guarantor.

A guarantor is effectively someone who agrees to be responsible for.

1:35

Repaying the debt that you borrow from a bank if you as the borrower cannot make your repayments.

So the guarantor will typically support your home loan by providing the bank that you borrow from with additional property security such as their home, or in some cases security of something like a term deposit.

1:57

So there are a couple of different items of security that can be provided to the bank, but the most common by far is definitely providing a property to the bank.

So why would you use a guarantor?

If you are looking to purchase a property, we’ve heard time and time again that if you don’t have a 20% deposit plus costs, you may be required to pay lenders mortgage insurance.

2:21

So using a guarantor is another one of these ways that we can avoid that pesky alumni.

You’ve got other options such as being able to borrow up to 90% depending on your industry.

If you’re eligible without paying lenders mortgage insurance.

You’ve also got options such as taking out the government guarantee scheme now under the government guarantee.

2:43

You only need to have a minimum of a 5% deposit that you put forward, and you can borrow up to 95% of the purchase price.

But there’s lending criteria and caps in terms of how much you can buy for and whether or not you’re actually eligible.

So for example, if your income is above the income cap, or you’re purchasing a property in your state that is above the purchase price cap, and you don’t meet the criteria of that government guarantee, you could definitely still look into a parental guarantee, one of the benefits of using a guarantor.

3:16

Is that you technically don’t need to put any money towards the purchase.

Typically the banks are going to want to see that you’ve got some sort of savings capacity or that you have built up some money over a period of time or even that you’ve been paying rent over a period of time to show to them that you’re not just trying to borrow 110% to cover all of your out of pocket costs and literally put not a scent into the purchase them yourselves.

3:41

But the banks do want to know that you’ve got some sort of ability to repay the loan anyway.

So there can be a number of things that they look for there, as I said.

Savings, maybe shares or something that you’ve invested into also paying rent are probably the most common three items that the banks will look for, but it’s not necessarily requirement that you need to put that money into the purchase.

4:03

So let’s talk a little bit about how the guarantor loan actually works.

And to do this, I want to use an example of purchasing a property for $1,000,000 with a guarantor and without a guarantor.

So we’re going to take an example of purchasing a property for $1,000,000 and having 150. $1000 in savings.

4:23

Typically if you purchase a property for $1,000,000 if you were to buy in Victoria, stamp duty is 5 1/2%, so that’s 55 grand.

Plus you’re going to have some smaller out of pocket costs on top of that.

So let’s say altogether to complete your purchase you need $1,060,000 to complete your purchase.

4:43

If you deduct your $150,000 in deposit or funds available, you then still are left with 910,000 that you need to complete the purchase now.

Usually without a guarantor, you’re already sitting at a 91% loan to value ratio. 910,000 being 91% of $1,000,000 So in this scenario if you weren’t eligible for a lenders mortgage insurance waiver.

5:11

Or you weren’t eligible for using a guarantor, you would need to pay 910,000 or you’d need to borrow, sorry, $910,000 as a base loan plus whatever the lenders mortgage insurance premium is.

Now.

I’ve done some calculations with a variety of lenders and that typically comes to about $35,000.

5:31

So all up, you’re now borrowing 945,000 out of that $1,000,000 purchase price, but you’ve still put 150 grand towards the purchase.

I-94 to 95% loan to value ratio.

The interest rates are more expensive as well.

5:49

O on top of obviously borrowing the 35 grand of lenders mortgage insurance or paying that out of pocket, you are also probably going to be paying somewhere between half to 1 1/2 percent higher interest rates than you would if you borrowed at 80%.

6:06

So that’s the example of purchasing without the guarantor now.

If that’s your only option, and you do want to get into the market as soon as possible, that may be the only alternative.

And that’s OK, but you obviously gotta weigh up all of the different variety of.

6:23

Options that are available to you.

And if you haven’t thought about the guarantor, I’m going to take you through now the example of this exact same purchase with the guarantor and how that can save you.

O Let’s look at that again.

You’re buying $1,000,000 valued home.

You need 60 grand on top of that to complete the purchase, so you need $1,000,060 in total.

6:45

You’ve got 150 grand worth of savings, so if we deduct the 150 grand off the total costs to complete, you then purchase, you need to borrow 910,000 to complete your purchase.

Using a guarantor loan, you can borrow that total amount at the equivalent interest rates of an 80% loan without having any additional costs on top and without being penalised from an interest rate perspective.

7:12

And so looking at how this is structured, what happens is out of your million.

Dollars worth of property value that you’re purchasing, 80% of that can be secured against your property.

So 80% of the value of your property is solely secured by the property that you’re purchasing.

7:29

So that’s an $800,000 loan.

Now we said that you needed to borrow 910,000 to complete the purchase.

So the difference between the two is 110,000 and that is secured by your property that you buy but also the parents property that they’re leveraging or providing to the bank as a guarantee.

7:51

So all up you still borrow the $910,000 loan amount in total but it’s either split into two with 800 being solely secured by your property and 110 being cross secured by yours and your parents home or sometimes depending on how the bank structures it, it can be bundled into one loan.

8:11

But the most important part to note here is that there is a portion that is linked to your parents property and that is the guarantor loan.

The benefit of proceeding with a scenario like this is you’ve now saved yourself that 35. $1000 in Lenders Mortgage insurance and potentially you are saving between half to 1 1/2% in interest rate O if we look at the total costs that you’re saving also on a monthly basis from a cash flow perspective, you could be saving somewhere around a minimum of $5000 per year in interest costs just by looking at this example here.

8:46

So you can see the benefit in year one that’s already $40,000 that you’ve saved by using the guarantor.

So it absolutely is a huge benefit.

The other thing that you can do with the guarantor in this scenario that we’ve just discussed.

You’ve put 150 grand of your savings towards the purchase.

As I mentioned earlier, you’re not actually required to put anything technically towards the purchase because we can lend up to the full costs required to complete the purchase by linking any additional funds required to the parents property as long as you have the borrowing capacity to do so.

9:20

So if for example, we looked at the same scenario but you decided not to put 150 grand in, in fact you put nothing in because maybe you wanted to spend your 150 grand on some Renaults.

Keep an emergency buffer and some new furniture.

In that case you’re going to borrow 1,060,000 with 800,000 secured by your property and $260,000 secured by your property and your parents property, and the guarantor loan is now 260,000 instead of 110 so you can see how that works.

9:51

You then do need to have the borrowing capacity though to be able to make the loan repayments on the full 1,060,000 that you borrowed across those two properties, so jumping back to.

Talking about who is the guarantor and what is a guarantor, let’s just have a quick look at who can be a guarantor and what are their responsibilities if they do decide to go forward with that.

10:14

Historically, A guarantor needed to be someone who was an immediate parent figure, such as your mom or dad.

However, a lot of that criteria has now extended to include more immediate family members and extended family members such as siblings and aunties and uncles.

10:30

So your guarantor doesn’t necessarily have to be your mom and dad, the guarantor.

Also is the person that actually has the legal ownership over the property that they’re putting forward.

So for example, if your parents lived together, but only your dad had his name on the title of the property that was being put forward as the guarantor loan, then he would be the guarantor, not your mum as well.

10:55

So you can see there how it’s a little bit more intricate in terms of the properties that they can provide to go forward to assist with guarantor loans.

It can be their owner occupied property, but generally if it is their owner occupied.

Property, a bank may want to see that they’re still working or they’ve got significant other assets because in the event that you weren’t able to make the loan repayments on that loan and they needed to come in and make up either the loan repayments or pay out the guarantor loan.

11:24

The last thing the bank wants to do is disadvantage your parents or your aunties and uncles or your siblings, whoever it is, that’s providing that property up front.

The last thing the bank wants to do is to have to take that owner occupied property from them.

In that regard, the guarantor does need to generally have some sort of significant asset backing or they need to be earning an income that could support the repayments if required.

11:49

Most of the time when we’re working with clients with guarantors if they do have or if they’re guarantor.

Houses have multiple properties.

The guarantor will tend to offer up an investment property rather than the owner occupied for that reason, so that is definitely a way to get around it.

12:07

You know what happens if there’s already a loan against the guarantors property.

So let’s say your parents had a property value of 500,000, but they had 300 grand owing, with CB8 as an example.

In that case, they may not necessarily be able to provide a guarantee because there may not be enough equity in their property.

12:29

So it depends on how much you actually need them to guarantee in order to determine if they’re going to be an acceptable guarantor.

There are some lenders that do not want the lending to be any more than 50% of the guarantors property value.

Or 80%, depending on the lender.

12:47

But ideally they don’t want to put the guarantor in a place where they’re geared right up to 80% or above, where again if they needed to sell that property, they may not have the capital to pay it back.

So as a general rule of thumb, if your parents did have a property worth $500,000 and they were going to go guarantor, 80% of that figure is 400,000.

13:09

So whatever they’ve got owing on their property, if it was 300,000, there’s only $100,000 worth of equity available that could be used.

The guarantor.

So in the example that we used earlier where you needed to lend one $10,000 as the guarantor loan, that would not be an acceptable scenario and you’d either have to reduce your purchase price to meet that or you’d have to look at putting in more money yourself as well.

13:32

So there definitely is an assessment piece that goes on with the guarantor and the value of their property as well.

That could also be a case of the guarantor looking at providing a different property as security that maybe didn’t have any lending on it.

Or, you never know, you might find a bank that actually values their property higher.

13:49

And they do have a little bit more equity available anyway.

So when they do OfferUp their property as security, the bank will conduct a full valuation and that will then determine how much of that equity is available.

So let’s talk about some of the risks and some of the key questions that I get from the guarantors themselves.

14:06

Whenever we’re doing a guarantor loan, we interview the borrowers and we interview the guarantors separately.

Generally the guarantors want to know a few things, like what happens if I want to sell my property?

What happens if I plan on refinancing my own loan down the track or the biggest one is?

14:21

When can our guarantee actually be removed and released?

So let’s go through those if your parents or your.

I’m going with parents because it’s the most straightforward example, but if your guarantor is looking to sell their property in the near future, I would be having a sit down conversation with them and just say.

14:43

What is the timeline looking like for that?

Because that could impact your home loan if your guarantor decides to sell their property before you have 80% left owing against the value of your property.

Then you may need to pay off some more of the debt to bring it down to 80% or pay lenders mortgage insurance.

15:04

So let’s go back to that same example we’ve been using throughout the course of this episode.

If you bought your property for $1,000,000, you’ve borrowed 910 in total across the two properties, and a couple of years passed by and your debts now down to 860,000.

15:22

If your guarantor all of a sudden decides to sell, but your property is still only valued at $1,000,000, you’ve still got 86% owing.

So in that case you either need to pay down 60 grand to get your loan down to 80% where Lenders Mortgage Insurance isn’t required, or you may need to refinance the loan with Lenders Mortgage Insurance on top of the 860 grand owing so that the guarantor can clear their name.

15:48

So you can see there that selling your property can impact it if there is no positive price movement to your property or you haven’t actually.

Laid down enough of the loan, yet another really common scenario that we see is clients will actually workout with us, all right.

So if we were to look at that 110 guarantor, $110,000 guarantor portion, what are the additional repayments that we need to make over a two year period to pay that off in two years?

16:12

And so we’ll sit down and do some calculations with them and look at, alright, if you were to put in an extra $500 a week, two years, you could clear the guarantor and guarantors love to hear that sort of thing as well if you’ve got a plan in place with your family.

But you can sit down with them and say.

Mum and Dad.

16:29

Thank you for offering to Go Guarantor.

It is really gonna help us.

It’s gonna save us $40,000 in the first year.

It’s gonna save us another $10,000 in the second year.

Our plan is to pay that off in two years so that we can clear your title of your property and give that back to you.

16:46

To do that, we’re going to make $500 worth of additional repayments per week and we’ll see that loan slowly going down.

We’re also hoping that our property value may go up a little bit over time and that will assist.

But if nothing else happens and we just focus on making these additional payments.

17:03

Our goal is to clear the title of your property within two years and if you can sit down, I think, and give that example with your parents and really show them.

How you anticipate and how you forecast to make this, these repayments, to me that goes a long way in.

It’s not about convincing the going tour, but it goes a long way in showing them that you’re again a responsible borrower just the same as you would be to a bank.

17:26

So in terms of looking at that sort of answers that third question that we went through which is when can the guarantor loan be repaid and when can they be cleared out of that borrowing arrangement.

And that is generally as I said, when the loan to value ratio has come down to 80% of the value of your property.

17:41

But the second question that we do get a little bit from the guarantors is in regards to refinancing.

So what if, down the track, the guarantor wants to refinance what they had owing?

On their property, but there’s that guarantee preventing them potentially.

Well, again, they may be restricted to not being able to refinance until the guarantor loan is cleared.

18:02

Or depending on the lender that they want to refinance with, they may allow the guarantor loan to still sit there.

But they will probably need to get consent from whoever it was that you took your loan out with.

So for example, if your parents had a loan with CBA, you could also get your guarantor loan with CBA, but there are some lenders that will be able to provide a second mortgage.

18:27

Behind CBA?

And So what that means is that in order of who gets paid out first, CBA would get paid out first because they’re the first mortgage over your parents property and your guarantor lender would be the second.

More ex.

It’s not an ideal scenario and there are definitely less lenders that do the second mortgage option and it can be a little bit tricky because the second mortgage needs to get consent from the first mortgage to do so as well.

18:53

So that is one option, which means that if they’re looking to refinance, they’ve got to meet those rules again.

Can that mortgage provide a first with a second mortgage?

If they’re wanting to borrow more money against their property, say they want to get some equity out for renovations or something like that as well, that’s where they need to be careful around their loan to value ratios and make sure there’s plenty of equity available.

19:17

And you haven’t sort of geared them right up to 80% either.

So there are a few different things and intricacies around the refinancing piece.

To sort of blanket rule it, it is going to be more difficult to refinance when there is a guarantee against your parents property.

So going into some legal particulars and nitty gritty details, it is a big deal to be a guarantor.

19:41

You are effectively agreeing that if anything is to happen where the borrower can’t make the repayments that you would be liable to repay either up to the maximum amount of the guarantee.

So the guarantor literally gives the bank the $110,000 that they guaranteed.

19:59

And clears that debt or they make their loan repayments against that.

So it is a big commitment and it is a big responsibility.

The good thing to know is that with a guarantor loan, it is what we call a limited guarantee.

It is limited to the amount that is secured against your parents property.

20:17

So in our previous example, it is not the full 910,000 that they’re guaranteeing, they’re only guaranteeing the 110,000 that is also secured by their property.

What that does mean though is that we strongly encourage and a lot of the banks actually require guarantors to seek independent legal and financial advice so that they actually understand the risks and impacts on their financial position.

20:43

I would encourage your parents to do this prior to even going ahead with the guarantor loan and agreeing to do that with you because we’ve had cases where clients have spoken to their family, we’ve advised them to receive financial advice or legal advice and they haven’t done so until they’ve received the loan documentation because the clients have bought a property.

21:08

And then all of a sudden the guarantors have said we’re not comfortable with this arrangement anymore, We don’t want to be guarantors.

Luckily for these particular clients, the family ended up gifting them the money anyway, so they didn’t need the guarantor and they still didn’t need to pay lenders mortgage insurance, which is fantastic.

21:23

And that’s because they didn’t want that requirement hanging over their head that they could be potentially liable for the repayment of this loan or have their home bundled up into a loan agreement.

So they decided to give the cash instead.

So I would strongly encourage you to not get to that position where you’re putting stress on a potential purchase, but instead if your parents are concerned about providing a guarantee or they need more information, then they should definitely go and speak to a lawyer or a financial planner well in advance.

21:58

Let’s also just check the differences between being a car borrower and being a guarantor.

So, so far, everything up until this point that we’ve been talking about is something called a security guarantor, which means that you provide security to the bank in the form of a physical property or the title of a property or a term deposit.

22:17

You can also provide a servicing guarantor, but this is something that is not really done anymore.

A servicing guarantor effectively assists you to repay the loan because you don’t have the borrowing capacity to meet the minimum loan that you need.

22:35

A security guarantor means that the parents or the guarantee or the guarantor does not have any sway on assisting with your borrowing capacity.

It is purely based on providing security to the bank to reduce the bank’s risk and to reduce the requirement of paying lenders mortgage insurance.

22:55

So that’s probably one of the biggest misconceptions when it comes to guarantor loans.

It does not help you borrow more money.

It helps you to reduce your requirement of having a deposit or to save you money on lenders, mortgage insurance.

And the final thing that I want to go over today is what information is asked of the guarantor in order to determine whether they are eligible and in order to proceed with the loan application.

23:19

So very, very similar to the borrower when they are going through or when you’re going through your purchase process, you need to provide ID documents, evidence of your income, evidence of your savings and also a summary of your asset and liability position.

23:35

A guarantor is going to need to do pretty much the same thing.

They’re definitely going to need to provide their ID documents to the bank and to us.

To ID them.

They’re going to need to confirm whether it be via pay slips or whether it be in writing, what their income position is, if they’re still earning income, and also what their assets and liability position looks like they’re going to need to confirm.

23:57

What other property assets do they have, What is their superannuation balance, what are their shares or other investment balances.

They’re really important because to the bank that is the guarantors way out of the guarantee.

If for example, it needed to be repaid.

24:14

As I said earlier, the last thing the bank wants to do is to actually have to sell the guarantors property or to take the title off them.

And so in the in the event that the borrower couldn’t make the loan repayments on the guaranteed portion, the guarantor may opt to take some money out of super or to take some money out of shares or to even borrow against their own property or refinance an investment loan or something like that to be able to pay out that debt without actually having to sell their property.

24:46

So the to the banks definitely want to know a comprehensive overview of their asset position.

And then secondly to that, they need to know what their liability position is.

Not necessarily, because they need to calculate whether or not the guarantor can meet the loan repayments if they needed to.

But more so because they need to know that the guarantor has always met their financial arrangements, that they’re not behind on any loan repayments, or that they’ve got any debts that are in arrears or they have poor credit history.

25:14

But they do need to know as well that if there is any debt owing against the property that they’re taking is security, they need to calculate that equity portion and make sure that they can go second mortgage behind whoever currently have has the mortgage on title.

So it is quite comprehensive, but it is probably not in as much detail that the borrower needs to provide.

25:36

So finally, to wrap up today’s episode, I thought I would just go through some key considerations and questions that you can speak to your guarantor about if they are considering going through with something like this.

So I would be looking at things like does the guarantor or the borrower have any plans in place if their circumstances change?

25:58

So have you got a contingency in place?

Have you got additional assets or savings that you are retaining should something occur?

Is the borrower or the guarantor expecting any life events that will change their circumstances?

Does the guarantor or borrower plan to sell their property soon or plan to borrow more funds soon?

26:20

Is the guarantor prepared and able to repay the loan if the borrower doesn’t?

Is the guarantor aware that the ability to borrow now and in the future may be affected by guaranteeing a property?

Does the guarantor have a strategy in place if their property is sold to repay the guaranteed portion?

26:39

Or are they able to borrow money from an additional property or liquidate some sort of assets if they need to repay the guaranteed amount?

Does the guarantor understand the duration of the guarantee and when they can actually have that released?

And also, does the guarantor feel pressure to become a guarantor?

26:58

That’s actually an interesting one because we do actually need to ask the guarantor that question and make sure that they’re not in any sort of pressure from a borrower or from anyone to actually provide that guarantee.

So there you have it, that’s guarantor loans.

27:14

If you’ve got any specific questions or scenarios that you wanna talk about, I am more than happy to do so.

We could even do a Q&A episode on guarantee guarantees and guarantor loans.

So you are most welcome to send through questions or feel free to reach out to us if this is something that you think might help you get into the property market sooner.

27:32

I’m also always happy to have a chat to the guarantors as well.

And as I said, we do interview them anyway and we go through what it is that the borrower is looking to do.

Generally, the guarantor has a pretty good idea of the borrower’s financial position, but I know that often they do want to just go through some key questions with ourselves as the brokers anyway.

27:50

So just to summarise, what is a guarantor?

A guarantor is someone who is actually agreeing to be responsible to repay the debt on the guaranteed portion of the loan if the borrower can’t make the repayments.

The guarantor is generally someone who has property security that they’re happy to provide to the bank, whether that be their owner occupied or an investment property.

28:11

But that does depend on the lender.

And the guarantor loan assists you as a borrower if you probably have a smaller deposit but a higher borrowing capacity.

So perhaps you have a really solid income or maybe you’ve been through some sort of life event that means you don’t have a lot of savings available, but you do have the ability to borrow well and truly in the ballpark of where you’re looking to purchase.

28:36

And in order to get that foot in the door, to avoid paying lenders mortgage insurance and to avoid higher interest rates, someone like a guarantor can support you to do so.

I hope you’ve enjoyed this week’s episode, and I look forward to bringing you another one next week.

Next week we have a guest and we’re going to actually be discussing a fun topic or a relevant topic, which is assessing your investment property portfolio and determining if and when it is the right time to sell a particular property in this market.

29:07

Thanks so much for listening everyone and we’ll speak soon.

Thanks.

For listening to this week’s episode of You Have My Interest, remember to subscribe to the show on your favourite podcast player.

To find out more about how Evelyns can help educate and empower you to achieve your goals with finance and property, just visit eveland.com dot AU forward slash podcast.

29:27

And book in a free discovery.

End of Audio

Tags:

finance, Lending, mortgage