Saving a deposit for a home or investment property is tough with the cost of everyday living. Then there are the added costs of legal fees, stamp duty, building inspection and lender’s upfront fees, insurance and other expenses. When you borrow more than 80% of the purchase price, most lenders will require you to purchase lender mortgage insurance. Some insurers and lenders will charge additional loading for investment properties. A limited security guarantee can help you secure that property with less cost and fuss.
A limited security guarantee loan has a guarantor to help you secure a loan. It is the same as having a guarantor on a normal home loan, only the guarantor’s liability is limited to part of the loan instead of being unlimited. The guarantor will need to hold a mortgage with a lender as security against a prearranged limited part of the borrower’s loan. This is usually an 80% (borrower)/20% (guarantor) split. This is a great way for family members to help you purchase a home without providing cash for the deposit. They use the equity in their own homes as security as part of your loan by agreeing to a limited guarantee on your behalf. With your loan to value ratio (LVR) reduced to 80%, you are not required to purchase lender mortgage insurance (LMI).
Who can be a guarantor?
Family members such as parents and siblings can offer a limited guarantee as long as they have enough equity in their home and meet lending requirements. Some lenders will accept extended and non-family members.
Benefits of limited security guarantee
A limited security guarantee has benefits for both; the borrower and the guarantor.
Borrower’s benefits include:
- assists people earning a good wage but unable to save a deposit for a home;
- borrow up to 100% of the purchase price of the property and funds to cover upfront costs;
- not required to purchase a lender mortgage insurance, which saves money;
- structure loan repayments to meet your needs and to help repay the guaranteed part of the loan;
- helps you avoid paying high-interest rates;
- you are still eligible for the First Home Owners Grant and have access to other loan features offered by the lender; and
- nothing to pay upfront.
Guarantor’s benefits include:
- limited liability;
- no need to change your existing lender (only if the borrower’s lender is happy to take the 2nd mortgage on the property); and
- early release from the guarantee when the borrower’s LVR reduces to below 80%.
When is the limited guarantee released?
This depends on the amount the guarantee was provided for. If it was 20% of the property purchase price, then it could take some time before the borrower could pay off that amount. An increase in the equity of the borrower’s property could also help towards releasing the security guarantee.