Guarantee loans, also known as family pledge loans, family guarantee loans, or guarantor loans, are loans where a family member or members use equity in their home or one of their investment properties as security to assist a borrower in financing their home. In most cases, this enables the borrower to purchase their home at a lower loan to value ratio (LVR) (80% or less) in order to avoid lender mortgage insurance (LMI) charges.
Some lenders have restrictions on which family members are able to be guarantors and what type of property can be used as security. Anyone acting as a guarantor on a loan should seek legal advice.
Certain lenders take an unlimited guarantee over the guarantor’s property, while some lenders offer limited liability guarantees. Limited liability guarantee loans allow the guarantors to limit their liability to the value of the loan above the 80% LVRof the property value being purchased or built. For instance, if no deposit has been contributed, then the guarantor’s liability is limited to 20% of the value of the property being purchased.
Once the borrower’s property is at an LVR of 80% or less in its own right, the guarantors can request the lender to remove the guarantee.
To find out more about guarantee loans contact Keypoint now to discuss your options.
The following are advantages related to most guarantee loans:
- Allows an applicant to borrow over 80% loan to value ratio (LVR) without incurring lender mortgage insurance (LMI) charges.
- May allow you to qualify for a better interest rate due to the low LVR (conditions apply).
- Can remove the need to demonstrate genuine savings.
The following are disadvantages related to most guarantee loans:
- If the borrower defaults, then the guarantor is liable for the loan.
- Not usually available with basic variable rate home loans.
- Additional costs can be incurred with guarantor home loans, such as set up costs and break out costs.