⭐12 Days of B&W Finance - Day 4⭐
Are rising property prices getting you down?
Do you have limited savings?
Feeling like the property market is unreachable, unlike the years when your parents bought?
Well here’s one word that can help you: Guarantors.
Welcome to day 4 of our 12 days of Black & White Finance, let’s get into it!
"On the fourth day of Christmas, Black and White Finance gave to me: Four guarantors,
- Three construction loans,
- Two different rate options,
- And a head start on my first home"
Guarantors: Who’s Who?
Guarantor loans are the financial term for when a close family member uses the equity in their existing home to assist their sibling/child/grandchild with obtaining a home of their own.
In most cases, the deposit itself plus the purchasing costs are what needs to be covered by the parent's property - In other words, what is being guaranteed.
The loan is then split into two sections;
80% of the property value is secured against the property the buyer is looking to purchase
20% of the property value + the costs are secured against the parent's property
Only when the initial deposit is paid off can this guarantee then be removed.
Case Study
Stephanie (19) lived in Sydney and worked part-time in retail. One mid-December day she was just finishing her shift after hearing Mariah Carey’s “All I Want For Christmas” for the 75th time and was thinking all she wanted for Christmas was a change in lifestyle and to move into her own place.
Stephanie was also a full-time student at university and when she eventually secured her degree she was left with a lot of debt and not a lot of savings.
She started working full-time in her industry, saved about $20,000 spare and managed to not only find somewhere to buy but was able to fully furnish it and avoid Lenders Mortgage Insurance (LMI).
How did she do it?
Put simply, she asked her parents to be guarantors on the loan she applied for, this meant she could keep her $20k. The property her parents owned had enough equity in it to provide additional security to the bank to cover the loan amount - the 20% plus the costs.
Of course, this would mean that in the event Stephanie could not meet her repayments, the bank could then secure her parents home (which is why it is important to seek independent legal advice before you become a guarantor). Luckily she never missed a repayment.
Guarantor Guaranteed?
There are a few requirements to getting a guarantor to help you purchase a property. Not everybody will be eligible but to help you understand exactly what’s required, here are the do’s and don’ts;
You must be 18+
The guarantor must be from your immediate family (Siblings/Parents/Grandparents)
The guarantors home must have significant equity
The guarantors home must be within Australia
The guarantor must be currently working
The Guarantor cannot be;
Previous partners
Friends
Work colleagues
Tomato/Toma-toe, Potato/Pota-toe
Many lenders have different names for guarantor loans, some obvious and others… not so much.
To save you the trouble of confusing financial lingo, here are the names the different banks use to reference guarantor loans.
These names might seem as though they are different, but you can rest assured they all function in the same way.
The way they vary is in how much each lender will allow for maximum LVR limit.
Final Thoughts
Guarantors can be an amazing way for new home buyers to get into the market. It is crucial to get independent legal advice before making any moves to ensure you understand the associated risks with guarantor loans but so long as you make all your repayments on time, there’s nothing to worry about and you can count yourself lucky to have family who is able to assist in making your dream come true!
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We’re also keen to receive your questions and if you want to know of some other great terms or rates on offer at the moment, and would rather email, please send a note to peter@blackandwhitefinance.com.au
* Your full financial situation would need to be reviewed prior to any acceptance of any offer or product. Subject to lenders terms and conditions, fees and charges and eligibility criteria.