Becoming a Guarantor
Guarantees can be provided for a number of reasons; investment, business, or often the most precious is the ability to assist you children or family member into their own home.
Just like buying a home you may only do this once of twice in a lifetime, so we have summarised some important information for you.
The most common type of guarantee when helping your children is a family guarantee. This method basically allows you to offer a percentage of equity in your property to offset the buyers deposit. In most cases the equity required will range from 1% – 20%.
A couple of things you should know:
- As a guarantee your personal property and financial position will be subject to financial risk should the borrower find themselves unable to make repayments.
- A part of your brokers responsibility is to ensure they assess both the borrower and guarantors financial position to ensure all parties can afford their commitments without any undue financial stress or impact.
- It is simplest to have the borrower and guarantors mortgage at the same financier (although don’t always have to).
- A Financier will most likely require an updated valuation with an LVR of 80% or less before they release the guarantee.
- A financier will require a valuation of the guarantors property which must hold enough equity to provide the guarantee.
- Offering a guarantee will restrict your ability to sell the property and potentially borrow further money from the bank. Always discuss your future plans with the broker before proceeding.
How can the guarantee be released:
The short answer is there is really only 1 way. A new valuation of the borrower’s property reflects a loan-to-value ratio of under 80%. Often borrowers of guarantors believe that once they have paid down the guarantee amount off, they will be able to release the guarantee. It is important to understand that this is not always the case.
What is the guarantor liable for:
This can change from bank to bank, therefore it is always advisable to seek independent legal advice. However, in the simplest form a guarantor will be liable for any repayment of outstanding debt after the sale of property, either by the bank or borrower, up to the amount offered by the guarantee.
Purchase price: $400,000
Guarantee Amount: 20%
Guarantor liability: $80,000
Make sure you speak to your broker about what being a guarantor means; here are a few questions to get you started.
What type of guarantee is it?
How much is the guarantee for?
What asset is being used for security?
What information can I access?
What are my restrictions to borrowing or selling by offering this guarantee?
- Date - April 20, 2018