Guarantor loans
A relative, child, friend or colleague that believes they will never get into the property market because of high prices should have this blog shared with them. This is an educational blog, with a story, on how buying property with low savings and short employment history works using the guarantor technique.
Jason finished studying 12 months before approaching Black and White Finance. He had a full-time job, a few liabilities and $19,000 saved to purchase his first property.
Monique had been working full-time as an executive assistant for a few different employers over the years and similarly, had $21,000 saved. Monique was referred to Black and White Finance by an existing client to purchase her first property.
Both Jason and Monique have now bought a unit each.
Importantly, they both not only have their first unit but kept their savings too while avoiding lenders mortgage insurance (LMI). Both these properties which are units for each different client, are only thirty minutes from Sydney’s CBD, not bad for such a low deposit right? Who says you can’t have your cake and eat it too.
How may you ask?
Well both Jason and Monique were very fortunate, they had family that had equity in their own properties to tap into. So even though they each had some money saved, their family had equity in their own homes to provide additional security for the banks to lend against. This allowed the family who was putting up the property as additional security to become guarantors.
If those last few sentences sounded Greek, then hopefully this helps clarify.
Basically, the bank takes a mortgage over the property our borrowers are buying, so the unit in this case. The second property that is being put up for guarantor purposes being the parents’ home, is also taken by the bank for security purposes. Guarantors are usually only siblings, parents or grandparents. If you as a borrower cannot pay back your entire loan being secured by both properties, the bank can go after the guarantor and as such guarantors should seek independent legal and financial advice before helping loved ones in this guarantor capacity.
Both Monique and Jason kept their savings that they had worked hard accumulating and put it towards furniture. They were both able to borrow the full purchase price of the properties they were buying, plus the costs associated (including the stamp duty). They both avoided paying mortgage insurance (LMI) because the bank has two properties to put the loan against, not just the one.
All borrowers must be able to afford the entire loan so even if borrowers that are using guarantors end up borrowing essentially 100-110% of their own purchase price, they must be able to afford the repayments according to each bank’s serviceability calculators.
The medium-term aim is for the borrowers to pay off the loan as soon as possible. In let’s say 24 months’ time, we can get their purchased property revalued and hopefully have enough equity in this own home, to be able to release the family guaranteeing property. This is how Mon and Jas will achieve their own property independence, releasing their guarantors from the equation.
Jas and Mon, thanks for letting me use your stories and sorry Mon I didn’t mention you in the video, we did it before we did your finance!
So that’s it. Always feel free to ask any questions and if you think of anyone else we may help, please pass on these blogs. I'd really appreciate that. Thanks again to Monique and Jason for letting us be their Mortgage Brokers in Rose Bay.
Peter Vassilis
Black and White Finance