Attwood Marshall Lawyers Property and Commercial Law Graduate, Mieke Elzer recently joined Robyn Hyland on Radio 4CRB to discuss the risks, alternatives, and tips to consider for people that are asked to guarantee a family member’s home loan.
With property prices still high across the country, first-home buyers are either being pushed out of the market or are looking at having to pay much more than they originally anticipated to secure their dream home. As a result, many house hunters are looking to mum, dad, grandpa, or grandma to go guarantor to secure their home loan.
With the average mortgage value nationwide sitting at an estimated $611,000, first-homebuyers who want to keep their loan to value ratio below 80 per cent to avoid paying Lenders Mortgage Insurance need to fork out a deposit of approximately $122,000.
Most first home buyers do not have this type of deposit available to them. This is where parents, grandparents, and potentially other family members come in.
When a family member guarantees or ‘goes guarantor’ on a first-homebuyers loan, they offer part of the equity in their own property as additional security to top up the buyer cash ‘deposit’. As well as securing the loan, having a guarantor can also mean that the buyer is able to avoid paying Lenders Mortgage Insurance saving thousands, or even tens of thousands, of dollars.
Who can guarantee or be a guarantor on a home loan?
Parents are of course the most common group to go guarantor on home loans for their children. However, different banks and lending institutions have different criteria to assess who can act as a guarantor.
Typically, a guarantor will need to be a legal guardian or close family member over the age of 18. This can include siblings, aunts, uncles, and grandparents. You need to check on the pre-requisites of the different lenders to see who they will accept and the terms and conditions they impose before making the loan application.
How much can someone borrow if they secure a guarantor on the loan?
If a parent or family member goes guarantor on a home loan, the borrower may be able to borrow up to 100% of the property price.
This will be determined by what the lender allows as well as the financial situation of the guarantor.
The risks people should be aware of if they are considering going guarantor on someone else’s loan
Going guarantor on a loan has its risks. The main risk is that if the person getting the loan cannot make their monthly home loan repayments, the guarantor can be liable for the repayments, or at least for the percentage of the loan they guaranteed. Quite often the terms of the guarantee are that if there is any default by the borrower, the lender can recover all ‘losses’ from the guarantor. This includes repayments and any shortfall if the property needs to be sold, as well as all costs associated with the sale and taking possession of the property.
Another considerable risk if the borrower defaults on their loan and there is a shortfall after the home is sold, it may be the guarantor’s home that is next in line to be put up for sale to cover the balance that the borrower owes to the bank. This is particularly relevant when there is a falling property market, as is the case at the moment with the rise in interest rates.
Although parents and grandparents may be sure their children have the best of intentions and at the time of guaranteeing the loan the borrower may have no issue making their loan repayments, unexpected events can happen which may change the borrower’s financial position, such as if they were to suddenly lose their job or became unwell and were unable to work.
It is important that guarantors have a contingency plan if something unexpected happens and the loan they are guaranteeing can no longer be serviced by the borrower.
It is essential that anyone considering going guarantor on a home loan seek independent legal advice to understand exactly what they are committing to and the associated risks.
There are alternative options that buyers should consider before arranging a guarantor for their loan.
Perhaps the buyer is eligible for government grants that will boost their savings towards the purchase price.
Queensland have on offer the First Home Owner Grant, intended to help first home owners get their home sooner. The grant offers $15,000 towards buying or building a new house, unit, or townhouse (so long as it is valued at less than $750,000).
There’s also the new Help to Buy Scheme, introduced by the Australian Labor Party. This is a shared equity scheme through which, the Government contributes up to 40 per cent of the property price for a new home, and up to 30 per cent for an existing property. Participants need only have a 2 per cent deposit and do not have to pay Lenders Mortgage Insurance.
Each state and territory have different schemes available so it is worth checking the relevant state government website in your region to see if you or your loved one may be eligible to claim one of the available schemes.
Tips for anyone considering going guarantor on a home loan
Make sure you set a limit that you are comfortable with and that you can afford to guarantee, and don’t go beyond that amount. Guaranteeing a smaller percentage of the purchase price may still be enough for the person buying the home to avoid having to pay the Lenders Mortgage Insurance. Reducing the percentage that you guarantee will limit the damage done to your own assets if something unexpected happens and the homeowner stops making their repayments.
Have a discussion early on with the parties whose loan you are guaranteeing about when the guarantor arrangement will end. Given that there is no time limit on how long a guarantor can remain on a mortgage, it’s important to set some ground rules early on.
Have these important discussions before signing anything so that everyone is clear on when the guarantor may no longer be required. For example, it may be decided that after a certain number of years, the homeowner will plan to refinance and discharge the mortgage once there is enough equity built up in their home, removing the need for the guarantor to be on the loan from that point forward. This can help the person buying the home remember that it is not just their money and home involved in the transaction and that they must consider the guarantors assets throughout the life of the loan.
Make sure the Guarantor obtains independent legal advice
It is very important that the proposed guarantor obtains their own independent legal advice before committing to this very serious potential liability if there is a default. Most lenders require an independent legal certificate from a lawyer to confirm they have explained the guarantee to the guarantor anyway. This must be from an independent lawyer and not the lawyer acting on the purchase of the property. Please click here to read our blog on this topic.
Attwood Marshall Lawyers – helping buyers, sellers, and guarantors make informed property decisions for over 75 years
Committing to going guarantor on a home loan carries significant risks. Although parents or grandparents want to support their children and help them enter the property market, there’s a lot that must be considered before taking that step.
Attwood Marshall Lawyers specialise in property law in both Queensland and New South Wales. We help buyers, sellers, and people who are considering acting as a guarantor on a loan agreement understand their rights and obligations before signing the contract.
We have conveniently located offices at Robina Town Centre, Coolangatta, Kingscliff, Brisbane, Sydney, and Melbourne. If you can’t see our team during business hours, our Robina Town Centre office is also open Thursday night until 9pm and Saturday morning until 12noon.
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