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Having trouble getting together a deposit for your first investment property? An equity guarantor may be the way to go.
Blogger: Warren Dworcan, managing director, Rate Detective Finance
This type of loan is appropriate when the applicant/borrower’s (your) income is enough to cover the loan and repayments but they do not have the required savings for a deposit.
The maximum lending usually available is 95% of the property’s purchase price so generally a 5% deposit is required. Saving this amount can often be difficult, especially when paying rent, so a guarantor can provide their property as a secondary security, worth minimum 20% of the loan, to allow the applicant to borrow up to 100% of the purchase price. Guarantors are usually limited to immediate family members.
Another benefit of having a guarantor is that the borrower may save by avoiding Lender’s Mortgage Insurance (LMI) which is required when the loan is greater than 80% of the value of the property.
The lender will use the borrower’s property as the primary security but will also take a mortgage over the guarantor’s property. The guarantor’s current mortgage will not change and they will not be required to make repayments as that is the borrowers responsibility.
After the borrower has built up equity in their property the guarantor can request to be released from the loan.
Anyone who is considering becoming an equity guarantor for a property loan is advised to seek independent legal and financial advice before accepting the role. Most lenders will insist on this.
Mr A wants to purchase a $500,000 property but does not have the $25,000 savings necessary for a deposit. As his income can cover a loan of $500,000 needed to purchase he can use his parents as guarantors and secure a portion of the loan against their property.
80% of the $500,000 ($400,000) will now be secured against the purchase property and the other 20% ($100,000) will be against his parent’s property. Therefore Mr A will no longer be required to come up with the $25,000 deposit.