Guarantee Loan

[bonanzawealth]

I've been hearing 100% LVR for purchase by using guarantee loan. However I'm still confuse how this actually works. From what I gather: Use parent's PPOR equity to finance 20% of the purchase.

The question is for the actual borrower, do they have to pay 2 loans: The 80% bit on the actual purchase and 20% bit for parent's equity?

Does it means the borrower has to be able to service the repayment of 100% of the purchase?

 

[Peter_Tersteeg]

The banks want the loan to be worth less than the property they're secured against. That's why the maximum you can borrow against a single property is 90%-95% if that properties value. They need a little equity buffer and this is why they require you to put in a deposit and pay for the stamp duty.

If you use an equity guarantee, your family gives their house as additional security so you can borrow more. You can structure this as one loan or two, the amount you can borrow is the same, but you're still responsible for all of it and you have to be able to afford all of it (hopefully it's structured properly so your parents liability is limited to a smaller amount).

 

[Corey Batt]

You've pretty much got it down pat. Here's an example of how I generally set them up:

500k purchase, 25k government charges.

Loan 1 (secured against new purchase): 400k
Loan 2 (secured against new purchase and guarantee property): $125,000

The client receiving the guarantee obviously has to pay both loans, and it would be ideal to pay down loan 2 first. It's possible with most lenders to have it as a single loan, but if this is a PPOR P&I scenario having the separation can help define what is what and provide goals.

Things to note:

• If the properties value increases, this assists with the LVR and can aide in removing the guarantee sooner
• The property providing guarantee needs to have sufficient equity to do so - this means max 80% LVR after the guarantee. There can be other requirements
• If the property providing the guarantee is with lender A, it's generally best to keep the purchase with the same lender if possible - otherwise you enter into a two lender arrangement which is *very* time intensive, costly and the original lender can outright deny the request.

 

[Terry_w]

I've been hearing 100% LVR for purchase by using guarantee loan. However I'm still confuse how this actually works. From what I gather: Use parent's PPOR equity to finance 20% of the purchase.

The question is for the actual borrower, do they have to pay 2 loans: The 80% bit on the actual purchase and 20% bit for parent's equity?

Does it means the borrower has to be able to service the repayment of 100% of the purchase?

Someone has to pay for it!

 

[Jake D]

You've pretty much got it down pat. Here's an example of how I generally set them up:

500k purchase, 25k government charges.

Loan 1 (secured against new purchase): 400k
Loan 2 (secured against new purchase and guarantee property): $125,000

The client receiving the guarantee obviously has to pay both loans, and it would be ideal to pay down loan 2 first. It's possible with most lenders to have it as a single loan, but if this is a PPOR P&I scenario having the separation can help define what is what and provide goals.

Things to note:

• If the properties value increases, this assists with the LVR and can aide in removing the guarantee sooner
• The property providing guarantee needs to have sufficient equity to do so - this means max 80% LVR after the guarantee. There can be other requirements
• If the property providing the guarantee is with lender A, it's generally best to keep the purchase with the same lender if possible - otherwise you enter into a two lender arrangement which is *very* time intensive, costly and the original lender can outright deny the request.

Great answer. I've done this twice now. Both exactly as described.
I found the process quite straightforward with CBA. We did the application in a branch for the first one ,and through a broker for the second.

For the first one, both the new loan, and the existing mortgage on the guarantee property were with CBA.

For the second, the new loan was with CBA, the existing mortgage was with P&N. there was a few more steps involved, and a little bit of time added. But nothing too stressful.

To remove the first guarantee, there was a full re-application with CBA. A new (single) loan was created that covered the two outstaning balances. I had paid down a bit, and the value had increased a bit, so that our LVR was more favourable.

To remove the second guarantee, we refinanced to a different bank. CBA was willing to do the refi, but wanted to increase out interest rate in the process, presumably because they would hold less security. I shopped around and was offered a better deal elsewhere. As it turns out, the application fee + LMI for the new bank was about half what we would have paid to stay with CBA as well.

Both times, the guarantee property had very favourable existing LVRs. one was about 10%, the other about 50%.

 

[Shahin_Afarin]

I've been hearing 100% LVR for purchase by using guarantee loan. However I'm still confuse how this actually works. From what I gather: Use parent's PPOR equity to finance 20% of the purchase.

The question is for the actual borrower, do they have to pay 2 loans: The 80% bit on the actual purchase and 20% bit for parent's equity?

Does it means the borrower has to be able to service the repayment of 100% of the purchase?

Its essentially cross securitisation and one of the only times when cross securitisation "works".

Your lender will go 2nd in line behind your parent's current lender (assuming its different lenders).

Your lender will calculate the equity available by taking 80% of the value of their property minus the existing loan against their property.

It becomes real fun if their properties are cross securitised.

Also be careful that some lenders are better than other when it comes to guarantors.