Customers, especially first home buyers, often ask about 100% loans. What are they? How is it they can borrow everything to buy a property and pay all the costs?
A Security Guarantee, or Family Pledge, is a loan which can allow you to borrow 100% of the purchase price plus costs. You can do this with little or no deposit. There is also the option (with some lenders) to consolidate a little bit of personal debt as well.
How it works: Your family members can use equity from their own property to provide additional security for a portion of your loan amount. This solution reduces your loan to value ratio (LVR) and can also save you a significant amount of money by avoiding the need to pay lender mortgage insurance (LMI). So you get into your home faster, with help from your family. Generally speaking, the banks prefer the guarantor to be parents / in-laws or siblings. However, depending on the lender, some will consider aunt/uncle or grandparents.
The limited guarantee is generally to be sufficient to reduce the LVR to 80%. It can also cover costs. So, looking at a $300k example you could borrow around $312k and the guarantee would be approximately $75k. Any debt that you consolidate could be added on to this.
The guarantor’s property type varies by lender but can be either their owner occupied property or an investment property. Generally speaking, lenders want to see that there is <50% debt outstanding on the house before the guarantee is given and no more than 80% after the guarantee is given.To release the guarantee, you would need to either:
Reduce the LVR is <80% through a combination of debt repayments and/or price increases; or
Restructure the loan to include LMI (which was initially exempt). However, the minimum requirement would be for the LVR to be <90%.
The guarantor is taking on a legal and financial commitment by agreeing to guarantee your loan. Despite the fact that you as the borrower will be making the repayments, if you were to sell the house for less than the debt outstanding the bank may look to your guarantor to cover any loss (limited to their guarantee amount). Because of this, your guarantors may be required to seek independent legal advice prior to signing the loan agreement. This will ensure that they understand their obligations and are fully informed as to the nature of their commitment. It will also prevent the bank incurring any liability in failing to exercise a reasonably standard of care in the discharge of their functions as a lender.
The thing to remember here is that so long as you maintain payment of the loan there is no ongoing cost to the guarantor. It is up to you, as borrower(s), to repay 100% of the loan. The guarantor is just there for security, not to make repayments.
The final benefit here is that you could potentially retain your savings for the renovations or purchases that you want to do. Or in the case of construction loans it could be put to use for window coverings or landscaping which is not normally included in the contract price.
When it comes to preparing a loan application the borrowers will be entered as normal with all their financial information. The amount of background information required for the guarantors varies depending on the lender.
The loan application process can take 1-3 weeks longer whilst the borrower’s bank seeks approval from the guarantor’s bank. If the guarantor’s house is debt free there shouldn’t be any additional time.