Go for a Guarantor Home Loan or is it unnecessary?

Discussion in 'Property Finance' started by FirstTimeBuyer, 3rd Jan, 2015.

  1. FirstTimeBuyer

    FirstTimeBuyer Member

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    I have a general understanding of guarantor home loans and its requirements from what I've read online. One of the advantages that I've read is that you can possibly get better rates via one. If that's true would it make sense to make a property purchase (PPOR) even if I could afford the 20% deposit?

    If the purchase was an IP, I can see that having more money in the mortgage would be advantageous as you could claim more tax benefits. Would the same be true for a PPOR purchase?
     
  2. Rolf Latham

    Rolf Latham Member

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    Hi FTB

    welcome to SS

    Not enough information..............

    while in general, being able to borrow 105 % approx for an IP may seem great on the surface, much depends on the capacity and smarts of the guarantor

    We do a lot of these things, but tend to prefer where the guarantor isnt retired, And/or using their only property ( ie PPOR) as the guarantee security.

    Note that there are lenders that will allow guarantors other than immediate family, which is a good and potentially so so thing.

    ta
    rolf
     
  3. FirstTimeBuyer

    FirstTimeBuyer Member

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    Thanks for the quick reply Rolf!

    The guarantor would be my wife's parents. From my understanding they have paid off most of the mortgage on their home which is their PPOR. They are still working but looking to retire in 5-10 years. What do you mean by capacity and smarts of the guarantor?

    I just want to emphasize that my wife and I do have enough deposit to make a 20% deposit for a reasonable house but I am wondering if there are advantages of taking out a guarantor home loan as opposed to a regular home loan. The thing that got me wondering was when I read that guarantor home loans can have better rates.

    Also correct me if I'm wrong, but assuming that we minimize the risk by purchasing a small IP, would it almost always make sense to make an IP purchase through a guarantor home loan vs a regular home loan? My wife and I are both currently unemployed (relocated from the US) but are expecting to have a combined income of ~230k so I don't think the risk of missing repayments will be high.

    Let me know if I need to provide more info!

    Thanks
     
  4. Jess Peletier

    Jess Peletier Mortgage Broker, Perth

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    If you're unemployed you'll need to have at least a month working before looking at buying a house - your wife's parents can add security for the deposit but cannot guarantee income/repayments.
     
    Last edited: 4th Jan, 2015
  5. FirstTimeBuyer

    FirstTimeBuyer Member

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    Thanks Jess. We're not looking to purchase immediately but I've started on my due diligence so when the time comes around I'll have a fair idea of various aspects of the purchase.
     
  6. Redom

    Redom Mortgage Broker

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    Heya,

    Not the costs on the guarantor - it has benefits to you, but has an impact your wife's parents flexibility with their PPOR. Their security will be tied up with yours.

    An alternate approach is to simply borrow money from them to fund a deposit for your purchase. In terms of loan structuring - its cleaner and preferred, but relies on trust/private contracts. The benefit of doing so is that your wife's parents wont lose the flexibility to sell their own PPOR and wont have their asset crossed up with yours.

    In terms of employment policy - you can get away with 1 day full time employment with a few majors (NAB). In fact, a formal employment contract will even do. Have done a few of these in Q4 last year for next years crop of public service graduates who'll be starting work next month.

    Cheers,
    Redom
     
  7. Terry_w

    Terry_w Member

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    There is a tax advantage in borrowing 104% of the purchase price of any property - even a PPOR if it later were to become an investment property.

    There are 2 ways to do it
    1. Guarantor loan

    2. Borrow from a related party

    Guarantor loan puts the guarantor's property at risk so risky for them. Generally no extra benefit in terms of rate, but maybe due to increased loan size.

    If borrowing from a related party then you need to seek tax advice from a lawyer or tax agent and to have a commerical loan agreement in place. After the property increases in value you may be able to increase the loan with the bank to payout the related party loan and to maintain deductibility of interest.
     
  8. Jamie M

    Jamie M Mortgage Broker - Oz Wide

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    Hi firsthomebuyer

    If you've got enough funds to contribute towards the deposit/costs then I'd leave the folks out of it. Particularly if you're looking at leveraging equity in this property later on to purchase again.

    Cheers

    Jamie
     
  9. Corey Batt

    Corey Batt Finance Broker

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    If you have 20% deposit as your original post alludes to, I wouldn't suggest going down this path. 'Cheaper rate' for guarantor loans isn't really the case for the most part.

    A guarantor will tie the parents property up as well as yours until it is untangled, providing limited flexibility and unneccessary costs. The real use of guarantor loans is if the borrower don't have a sufficient deposit, with the ancillary benefit of avoiding LMI.
     
  10. Rolf Latham

    Rolf Latham Member

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    And your often 3rd one

    use a TD for a part security, though that doesnt always work financially due to the spread between the TD rate and the mortgage rate

    ta
    rolf
     
  11. FirstTimeBuyer

    FirstTimeBuyer Member

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    Thanks all. Based on the answers I may bypass a guarantor home loan and go for a normal mortgage using our savings. It seems like the real benefit of a guarantor home loan would be reaped if we didn't have much savings to start off.
     
  12. Kinnon Bell

    Kinnon Bell Member

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    That's generally what they're there for.
     
  13. Shahin_Afarin

    Shahin_Afarin Finance Broker

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    Preference is for parents to do an equity release (provided they can service the debt) rather than family guarantee (no servicing required).

    A family guarantee can be messy as you are effectively cross securitising your parents property with your property but it allows you to keep the 20% deposit and use this for future purchases.

    Think long term and work backwards.