What is a “guarantor”? Investment terms explained
A guarantor for your property is someone who signs on your behalf to help you get into the property market.
Using a guarantor can mean that you can purchase without saving a deposit and you may even be able to borrow the full purchase price and costs, although some lenders do require you to have some of your own equity to fuel into the purchase.
Essentially, they are a safety net for the lender, as they are expected to pay your loan if you default and if they do not then they will take their assets that may have been used as security – for instance, their home, which is usually the asset used. A mortgage is taken over their property by the lender.
The Commonwealth Bank explains that guarantors assist by helping you get into the market with a broader choice of home loan options. This may allow you to use more funds than you’d be eligible for without assistance and allows you to leverage off of their equity to buy your own property and reduces the likelihood of requiring LMI.
A guarantor’s ability to borrow is affected once they are standing for you, however the amount of the guarantee can vary from the full amount of the loan to just 20%. Discuss this with your broker, but often you can have the guarantee in such a way that the guarantor is only responsible for the % selected, in this case just 20%.
Mortgage Choice explains that a guarantor is involved in the loan until the guarantee is released. This may be done by building up equity in the property, and sometimes by paying some fees as well.
Who can be your guarantor?
Usually a guarantor is a parent, and many places require them to be an immediate family member. Some lenders extend this to grandparents, however there are a few lenders who allow non-family members, including ex-spouses, to stand in as guarantor. That individual will also need a healthy amount of equity in the property to be acceptable to the lender.
At St George, they call this a 'Family Pledge'.
They provide this example:
John is planning to purchase a $300,000 property with a $15,000 deposit (LVR of 95%), which means Lenders Mortgage Insurance (LMI) would be payable.
If John’s parents were existing St.George Bank Home Loan customers or had a freehold house and agreed to provide a family pledge guarantee of $56,500 as an additional security, the LVR would reduce to 80%.
This would result in the LMI premium requirement being waived, saving John up to $5,800.
Things to remember
Usually, a guarantor cannot help with a refinance and often just one guarantee is allowed per person. It is usually kept solely to residential property as well.
If you don't think you can repay the loan, or your concerned with how you will manage this, be open with the guarantor. They are also liable and you'd be wise to be transparent with them about your repayment abilities.