Using Guarantees to buy with less than 20% deposit
With severe restrictions on borrowing with less than a 20% deposit, one way around the rules is to use a Guarantor, often a parent or close relative. We can set up limited guarantees which reduce the risk for the party giving the guarantee. A Limited Guarantee is limited to that part of a 20% deposit that the homebuyer doesn't have themselves. If a homebuyer is buying for $500,000 and has a $50,000 deposit, then we'd need to get a guarantee for $50,000. Depending on the lender, we can limit the guarantee to the specific loan facility. This means the guarantor is not guaranteeing (1) the whole mortgage and (2) any other debts that the borrower might have or may later get with the lender. This is particularly important where the guarantor is only related to one of the borrowers and the borrowers are in a de-facto relationship. The guarantee must be over Security. That security will generally be a mortgage over a property for the amount of the guarantee. The property will need to have enough equity to cover the guarantee and still have less than 80% borrowing on the property. Another option is to use a Term Deposit as security. This is a fantastic option, and one parents or grandparents are most comfortable with. Essentially the guarantor simply needs to have a Term Deposit with the bank, its in their name and they continue to receive interest on it. They can have the term deposit on whatever rate term they want but cannot withdrawal the funds until the guarantee is removed.
Minimising the Risks
By structuring Guarantees correctly we can minimise the hassle and risks for the guarantor. We also put Mortgage Protection insurance in place on the borrowers which insures the mortgage payments should an accident or health prevent the borrowers from working. The only thing we cannot protect guarantors from is the borrowers going AWOL and becoming P addicts. It is still important to go into these with your eyes open.
Removing a Guarantee
We set up guarantees so they are removed at the most within 5 years. We do that by setting a minimum repayment of the loan that has the guarantee paid off in 5 years. If they get say 2.00% property price appreciation then a guarantee can be gone in 18 months to 2 years.