which option? Using guarantor to avoid LMI

Hi all,

Looking to go in on a development block at 92% LVR and use guarantor to avoid LMI.

Purchase price $530k - I will use $45k out of the offset and there would be approx $60-80k gap to be guaranteed against.

Broker is working with NAB and mentioned they require guarantor to do full loan application details (including servicing capacity, incomes, assets, liabilities etc)

Problem is Gaurantor does not have steady income however is willing to either secure against $80k cash in a nominated account etc or against his PPOR.

I have been advised that NAB guarantor needs all the supporting documentation etc which guarantor is not willing to do. Additionally not sure however thought NAB guarantor option allows access of equity whereas CBA and ST George setup a "2nd mortgage" option?? I believe the latter is restrictive around equity release and broker advised may be more complicated and messy to setup.

Broker mentioned CBA would be easier to setup with a cash security option.

I am wanting NAB based on above, what is realistic based on guarantors position and cash availability?

Thanks in advance

 

A development at 92% is a tad risky! Sounds like you haven't done one before so it is even more risky than normal. Also today's climate makes it risky from a market point of view.

It would be very risky for the guarantor. Have they sought legal advice?

 

Thanks @Terry_w - there is a house on there will be holding for 5+ years - almost neutral.

My father will be the guarantor- I have no issues with projected holding costs I have positive CF on two other properties which will offset any shortfall holding here.

 

With family involved there is even more reason for your dad to get independent legal advice. Often lenders insist on it.
I have seen families torn apart when arrangements like this go bad, particularly if there are other siblings.
Marg

 

What if costs blow out? What if the builder goes bankrupt mid project?

I would say it is too risky to do the project and much too risky for your dad. If I was his lawyer I would advise him not to guarantee your loan - not just tell him the risks, but tell him he shouldn't do it.

 

Happy to do that - not an issue. Father has received large redundancy payout however I need to arrange pre approvals so I can move. Not sure what options as above I should be proceeding with.

 

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OK so best to use LMI in this scenario? - $80k would not bother my dad if thats the true risk value to him. My biggest issue currently would be if I bought a big block & I could not get DA approval and had to do a smaller development e.g. 2 townhouses.

This a 4x townhouse build & not a block of units. I have exit points throughout the hold process, add value options including sub division, renovation to improve. If at a point prior to build commencement I decide to not proceed due to various reasons, I sell. If the market is slow I will wear the loss at that time however I have added significant value during hold period to help mitigate that.

If I choose to continue then I select a builder and acquire funding to proceed along with contingency. There is risk absolutely, I have mapped out my options to try and mitigate however there are somethings out of my control which will always have a level of risk attached

 

Back to my original question - any brokers out there about to shed some light on which options exist? Eg. Cash security from guarantor which do not involve the guarantor having to complete the full loan application. Thanks

 

Ignoring the risk(s)
If it is only equity why doesnt your dad 'lend', 'gift' or otherwise transfer the cash to you. You can provide this as cash security to the bank, the interest earned can be returned to your dad, and you can pay interest on the bank loan.

Keeps your dad enitirely out of the picture from a banks point of view, minimises his risk to the level of cash he provides to you.

Im certainly not advocating you do this. As others have mentioned borrowing +/-100% of property value for a development site is well outside my risk profile (and the bounds of 'normalacy' - moving closer to the levels of 'insanity' IMO). But its not my money (or my family) at risk here.

Best of luck.
Blacky

 

You want a security guarantee. Most lenders will do this but some don't like using the main residence of the guarantor and others can to make sure the guarantor has enough income to pay the loan if the **** hits the fan - they don't like selling up parents properties.

 

I bought a house way over budget, needed 300k. Made a call to parents in my native country. It's the amount they have never really seen in their lives. My dad ran around borrowing from relatives, put their house to bank. Got the required amount in due time for settlement. No questions or complaints ever asked. That's what parents do for their children.

 

Yes, but is it what children should do to their parents?

 

Is the potential profit on this deal worth more than the relationship with your Dad?

If yes - go for it.

 

Thanks for all the input but all I'm hearing is judgment without any knowledge of my family or personal cash situation. I am purchasing a property yielding 4% to have a subdivision and DA done. If I decide in 5+ years to build I will otherwise I'll sell with a subdivision and DA. This is not a super difficult exercise, I am land banking.

I have not ignored any commentary in fact I've been sitting down with my dad for 2 hours going through commentary provided.

Understand I am in relatively good income position with low living expenses plus a supporting family who are more than happy to assist as I am for them.

I am simply trying to avoid LMI as I am keeping my $100k offset remaining cash to fund a wedding and a high cashflow IP post this. If I really wanted I could tip it in and lower lvr however to mitigate risk I'll simply keep the cash in the offset as described above.

Thanks for the input thus far

 

ANZ has the easiest, or most flexible guarantor policy. Been tweeted a little lately, only available for fhbs and some other changes. Might be worth investigating if it meets you and your dads needs.

 

I guess what most of us are saying is that we have all seen these kinds of things go badly. And when they go bad they go very very bad.
Families literally broken apart.

Given your position you may need to delay one of your purchases in order to 'go alone' - however, its may be a sacrifice worth a lot more than the sacrifice itself.

IMO - regardless of your fathers accepting the terms or not - the 'right' thing to do is to do it youself.

two sides to a coin

Blacky

 

Also bear in mind that while NAB might allow the initial purchase they're unlikely to allow the subdivision - a four unit block is against policy for them so you'd need to refi to another lender for the development part unless they do it via commercial lending. Also unlikely anyone will fund a 4-pac at such a high lvr via Resi lending so you'll need to have a plan to reduce it prior to the development.

 

Appreciate the input and can agree with Blackys view, I will be heavily focusing on debt reduction for the next 3 years and may not choose to go in another IP so I have some cash as security. My fiancé and I will be combining incomes and living together putting all our $ away.

Thank you Jess, I have also read comm finance required over 3 dwellings (generally) so I will need to think this over a little. I have the options in my hand as to whether I just extend the hold period a little longer as I reduce debt to allow servicing but these are important points.

I will be discussing all points raised to get a better view. Appreciate the input and suggestions, I will be discussing options with broker and family to work best option that presents least risk to guarantor.