Many lenders allow a family member to help their kids or other family member to buy their own home by providing additional security. The person providing this assistance is known as a guarantor. This is different to being a co-applicant or co-signer. A co-applicant is included on the loan and will be responsible for the entire loan until it’s repaid in full.
A guarantor, on the other hand, is linked to a loan by a guarantee. This guarantee can be released and the guarantor’s responsibility stopped without the loan being repaid in full. To use a guarantor, the customer must be able to service the entire loan on their own income.
If a customer is not able to save up a deposit, or the wish to avoid paying Lender’s Mortgage Insurance (LMI), a guarantor can help. Most commonly, a guarantor is the parent or a relative of the customer. They will assume responsibility of paying off the loan, if the customer is no longer able to meet their financial commitment.
Example of a guarantor loan structure
KIDS NEW HOME PARENTS HOME
Value: $450,000 Value: $650,000
Loan: $360,000 (80% LVR) Guarantee Loan: $95,000 (20% dep + costs)
In most cases, the parents can keep their own home loan at the bank they are already with and the kids bank will take a second mortgage against the parent’s home. This is called a limited liability guarantee and is usually for 20% of the value of the kids home plus some extra to cover costs. The parents own bank will not allow them to go over 80% LVR including the loan they are guaranteeing for the kids.
Each loan will be assessed based on the applicant’s individual circumstances and will vary from lender to lender