How is the Mortgage for the Guarantee Structured?

The loan is secured by both the property that you are buying and the property owned by the guarantor. It is quite simple, and if you use a limited guarantee then the guarantor can reduce their exposure to your mortgage.

 Who can go Guarantor?

Most banks will only allow parental guarantees, i.e. a guarantee from the borrower’s parents. Some lenders can consider guarantees from immediate family members such as siblings, grandparents, spouses, de facto partners or adult children. However there is a lender now that will take a guarantee from a non family member.

How much is the guarantee limited to?

In the vast majority of guarantor loans we ask the lender to limit the guarantee secured on the guarantors property. This means they are not liable for the entire amount of the loan, only a portion of it. The size of the limited guarantee is calculated as follows:

Size of the limited guarantee = (Loan amount / 0.8) – value of the property the borrower is buying.

For example if you are buying a property for $300,000 and are borrowing $315,000 to cover your expenses such as stamp duty then the calculation would be:

$315,000 loan amount / 0.8 = $393,750
$393,750 – $300,000 value of the property you are buying = A limited guarantee of $93,750

How do lenders work out if your guarantor has enough equity in their property? The total debt secured on the guarantors property, for example their current home loan plus the new limited guarantee, must be less than 80% of the value of their property.

For example, if your guarantor had a home loan with $100,000 owing and they needed to give a limited guarantee of $93,750 then the total debt secured on their property would be $193,750. Their home must be worth $242,200 or more for the guarantor loan to be approved.

 To remove the guarantor – Your loan must be less 90% of the property value (ideally 80% or less), this is achieved by

1.  Paying off the Loan
2. capital growth (Market moves up by 20%)

Guarantor loans have several benefits for you as the borrower:

• Save money by avoiding LMI Insurance. This could save you Thousands$$
• You can borrow more money.
• You can consolidate some minor debts such as credit cards when you buy your home as long as your loan does not exceed 110% of the purchase price.
• You do not need a deposit, allowing you to buy a home now.