What is a Guarantor Home Loan?
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Transcript of: What is a Guarantor Home Loan?
Hey, guys! Today’s episode is on Guarantor Home Loans. We’re gonna make it short, sharp and to the point. Let’s roll!
Hello and welcome to the First Homeowner Concierge Podcast, where our sole target is to get you into your first home.
Now onto today’s topic. What is the Guarantor Home Loan?
This is one of the questions people ask generally when they haven’t got a very large deposit.
A guarantor home loan simply seeks to use a family member who has a property that they own and they put that up as co-security against the loan.
What happens with a loan is that you borrow the money, the bank takes your property that you’re purchasing as security.
In the case when you’ve got low deposit or no deposit, the bank deemed the loan too risky because they’re lending too much of the purchase price for that property.
What is the role of the Guarantor?
So, a guarantor works when they put their property up as co-security to the loan. It makes it a lot less risky to the lender.
One thing I should get into, I probably should have gone into first – guarantor home loans are also known as family pledge loans or family guarantees.
They’re all the same thing, it’s just that they have different names of different lenders.
So let’s go back to the home loan. You’ve got your home loan, you’ve got your security, and you’ve got your family member, usually parents as security on the loan and that reduces the risk to the lender.
I’m just going to go into how that works in terms of the actual loan and kind of explain it so that you’ll understand the risks that the guarantor takes on when putting their property up as guarantor.
How does the Guarantor Home Loan work?
Basically, how it works is, if for whatever reason, you don’t pay the home loan repayments, you fall into default.
Default is basically when you’re two months behind on any bill, you’re technically in default.
So after a certain period of time of the bank chasing you, and not getting anywhere, they’ll sell the property out from under you.
So the ideal scenario, if that happens, is they sell your property. Whatever they sell your property for, they can pay the loan out and all their legal fees and late fees and all that sort of stuff that’s involved with foreclosing. They just pay it from the sale of your house and generally, that’s what happens.
The risks of a Guarantor
If you look at a property in the last 30 years, that’s what happens because the property prices typically go up over time.
There are cases, however, when a lender sells the property, but they then haven’t paid off all of the loan.
Let’s say the lender comes in and they sell the house or the property, and it’s gone down by 20% and at the end of it, you still owe the bank $20,000. This is where the bank come in and go, “Hey, guarantors, the borrower stuffed this up and we’re owed $20,000 now”.
Usually what happens in that situation is, the bank gives the opportunity the guarantor to just give them the $20,000. If they can’t do that, and they can’t borrow the $20,000, then they could be forced into selling their property. And that’s where the risk lies with the guarantor.
If you look at it one way, the bank are not taking on as much risk, but the guarantor has assured more of it.
A common question I get asked, is when a guarantor can be removed from the loan. A guarantor can be removed from the home loan when the loan is 80% or below of the value of the property.
Usually this occurs over a few years once the property is increased in value.
However, it can also be achieved by paying the home loan down faster. In most cases, it’s actually a combination of the two.
How does the guarantor effect the Home Loan Application?
So, we’ve gone over the major factors involved in using a guarantor. We’ve gone over the main risk for the guarantor.
Let’s circle back to a couple of important factors when qualifying for the home loan.
Before jumping into that, I’d be really interested to hear what your main challenges are when you’re trying to buy your home. So feel free to put any questions down in the comments or any comments in the comments and I’d love to check them out.
So the other factors, and this just basically comes down to any home loan is, is there enough deposit? Do I have the income?
So the deposit for a guarantor home loan really depends on which lender you go through.
Some lenders allow lending for 105% of the purchase price which covers you for all your costs, meaning you don’t need to have any deposit. Other lenders will want to see that you have 5% saved in your account for at least three months.
The second one is the income. So you still need to get assessed for the loan amount and for the bank to approve you for that home loan.
Just because you have a guarantor, it doesn’t automatically mean that you’ve got green lights. The lender will first want to assess the loan application.
The Wrap Up
That’s basically it guys, just like I said, short, sharp and to the point. If you’re needing help with a guarantor loan or just got any questions, feel free to get in touch and we’ll be happy to help! Till next time.
Thanks for listening to today’s episode of the First Homeowner Concierge Podcast. If you’ve got any questions or you’d like to get into your own home, or you just want to stalk me online, you can search Will Bell Mortgage Broker on either Google, Facebook or Instagram.
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