Guarantor Technicals

Hi ,

Can someone please explain how a guarantor loan works?

E.g say a buyer is purchasing a property for 800 k, their parents own their own home. How does the buyer go about securitising the property and what are the requirements eg what’s the deposit required, LVR requirements etc?

Thanks.

 

Generally the parents property will be taken as security, in addition to the property.
Some banks will allow you to split the loan so 25% amount is secured against the parents property and 80% against the purchase property. that way you can pay down the 25% loan first and then discharge the mortgage over parents property and remove their risk

 

In what way? In short, its likely that the parent's house becomes additional security for the loan. So whatever 'equity' is in that property would be at risk and would be what might be taken into account by the new lender.

 

Using a family guarantee you can effectively avoid needing a deposit at all.

With most lenders, the guarantee amount (up to 25% of the primary property value) usually can't be more than 50% of the value of the guarantor's property, but there are exceptions up to 80%.

The remaining 80% of the funds are secured against the primary property being purchased.

 

@Terry_w @Peter_Tersteeg
Assuming combined LVR is 80% (taking into account guarantor's property and loan and applicant's property and loan).

Does this arrangement impact future borrowing power of guarantor?
Are guarantor's incomes also assessed?
Does it matter if guarantor is a sibling (not a parent)?
Do both loans have to be with same bank?

 

1. generally not
2. generally not, but sometimes
3. yes, not allowed with most lenders
4. generally yes, some will take second mortgages

 

If the total LVR across all all loans and all securities is 80%, it's probably fine, as long as the guarantor's portion is no more than 50% of the guarantor's property value.

 

Can a guarantor be a guarantor on two loans (Say two sons) provided equity allows?

 

yes i think so

 

On a similar vein, I've tried to Google for it but couldn't find an answer to this one: Can you have 2 guarantors for 1 property/loan?

E.g. Parents and in-laws each provide a guarantor for the 1 property/loan to be bought/serviced by a couple.

 

yes, but would be unusual.

 

If you're talking about providing two separate security guarantees for the property being purchased then no, majority of lenders won't allow this.
There are alternative ways to do that though, best engage a broker.

 

Definately a issue for a broker. Many lenders oppose guarantors as they just end up in bad media and PR when nanna loses her home. Generally by the time a guarantee gets called the principal loan is in severe arrears with penalty rates and fees adding and compounding. Throw in low equity and it can mean sale of TWO properties where there is no financial capacity other than through the asset. Some lenders offer limited guarantees as Terry said on 27 July.

Guarantors are usually requested to get independent legal advice due to the high risk to the guarantor v the borrower. (one has loan security and the other doesnt eg parents have more risk) Many kids think guarantor loans are a easy path and many parents lack comfort with the risk

Going guarantor on a loan - Moneysmart.gov.au

 

Will do, thanks for the reply.