How can I know which lender is offering the lowest 5 year fixed rate?
Unfortunately, no one publishes the lowest 5 year fixed rate in the market at any given time so it is not as easy to find one. If they did, all one had to do is look it up on a loan comparison site. This is something you would have to dig around to find out for yourself if you are considering taking out a 5 year fixed rate. Each lender considers a number of unique factors when setting their rates. For instance, there are discounts given for huge loan amounts. The percentage for these discounts varies from one lender to another. Now, few people know of the existence of these discounts because they are not advertised. There are also discounts for loans taken alongside professional packages, whose percentage varies from lender to lender.
Fixed rate loans attract a number of charges and fees which are not obvious from the start. It is wise to get the advice of mortgage consultants such as Home Loan Experts, who know the in-workings of a large number of lenders. They will help you understand how each lender’s policy works and find you the most affordable 5year fixed rate.
Can you have an offset account and pay extra off your 5 year fixed rate loan?
Some lenders offer this flexibility. Unfortunately, it is an option available with only a few lenders. Most 5 year fixed rate lenders do not allow clients to have an offset account. A good number of those that allow extra repayments limit them to a certain amount. Again, mortgage experts will help you find a lender who offers this.
Can I change my loan into a split loan?
No. The 5 year fixed rate cannot be changed into a combination or split loan where you pay a fixed rate in one half of the loan term and a variable rate in the other half. The fixed rate remains constant all through the fixed rate period. This will be clearly stipulated in the loan agreement.
Implications of locking in your rate
It is common for lenders to give you a different rate (usually higher) than the one quoted to you during your inquiry. Sadly, you have no way of knowing the actual rate they will give you because the rate is decided on the settlement day of your loan. So you get a quote for 6% and excited that the rates are bearable, you apply for the loan. However after the loan settlement, your statement reads a different rate, higher by 1% – 2%; and being a fixed rate agreement, there is nothing you can do about it.
This is a loophole lenders use to net in new customers. They know that application and loan settlement are weeks apart. So they quote the lowest rate for you, knowing full well they will give you a higher repayment rate. The excuse you will often hear is that the rates went up before settlement could be done and there was nothing they could do to revert to the old rates.
Because of the uncertainty of the rates, most lenders give you the option to lock in your rate, but at a fee. A few really good ones actually do it for free. How this works is that on the day you are applying for the loan, they give you the opportunity to lock in the day’s rate. Alternatively, they fill in the quote you were given in your quote if you prefer. Go for this option if the rate is lower. With a rate lock in place, the lender will not be able to twist the rate to a higher percentage and your loan repayments will be based on the quoted rate.
Rate lock policies differ from one lender to another. It is important to get an understanding of what each policy means before choosing your lender so as to know how this will affect your finances.
Is a 5 year fixed rate more cost effective than a variable rate loan?
You will save money. With a fixed rate loan, you already know how much it will cost you to repay the entire loan. You can actually work out your total instalments and know how much your repayment sum will add up to after 5 years. The greatest advantage of this kind of loan is that your minimum instalments remain level across the 5 years.
Compared to a variable rate loan, the fixed rate offers a high level of certainty, something you are never quite sure of with a variable. The interest rate over the first half of year one may be low then it suddenly increases in the second half of the year, pushing your instalments higher. What happens when you hadn’t budgeted for it? You run the risk of defaulting, which has its own consequences.
20 yeas ago, variable rates were a better choice because rates were taking a downward trend mainly because of the competition building up. Today, the opposite seems to be happening and with a fixed rate, you are protected against future increments.
Are there times when it is unwise to take a 5 year fixed rate loan?
Yes. If you are likely to opt out of the loan in the course of the loan term, it is best not to take it up in the first place. Exiting the loan in the initial years is especially costly as you have to pay termination fees which are often high. An honest evaluation is needed here.
Different lenders calculate the termination cost is calculated differently and what may be low for one lender could be high for another. Basically, if the prevailing variable rate in the market is higher than the fixed rate you’ve been paying, the break charges will be low. If on the other hand the variable rate is lower than your fixed rate, the higher your termination fee will be.
The fees charged are directly proportional to the difference between the fixed rate and the prevailing variable rate. The greater this difference is, the higher the cost will be for you. Whether low or high, you will lose money either way. The only way to avoid this is by not taking the loan.
Who qualifies for a 5 year fixed rate loan?
This option either as an investment loan or home loan is best left to people who have experience in investing and who have a solid back up that they can use to make repayments should their financial situation change.
It is also ideal for people who are sure that their financial situations will not be negatively affected over the course of the 5 year fixed period. People looking to buy a retirement home or family home which they intend to own for years to come will benefit from a 5 year fixed rate. Those looking to build investment property which they intend to run for a long period will find the 5 year fixed rate more economical.
If you are not sure whether your circumstances qualify you for a 5 year fixed rate, you should consult an expert who can assess the situation and give you the best option.
What is a 95% Investment Loan?
A 95% investment loan is ideal for those of you who do not have a large amount of savings.
With this type of loan, the bank will fund up to 95% of the purchase price of the loan and the borrower must contribute the remaining 5% of the loan amount. The borrower must also pay any associated legal fees and stamp duty.
General Information about 95% Investment Loans
Banks are usually reluctant to lend more than 90% of the purchase price. The mortgage lender must have a certain level of assurance that they will be able to recover the full amount in the event of a default on the loan. The 95% investment loan only allows the lender a 5% buffer if the borrower defaults on the loan.
However, where you have pre-existing equity in any property, this will support your application. The banks take other factors into account, including, your credit score, employment status and the strength of your finances.
The lender will also consider the type of property that the investor is buying, whether it be a free-standing home, unit, apartment or town-house.
Refinancing borrowers typically do not qualify for 95% investment loans.
Loan types and rates
Banks offer a variety of loan options with different fees and rates. Borrowers should shop around so that they can get the best deal.
Many banks offer low and fixed rate or variable interest rates. Some 95% interest loans do not charge application fees or account keeping fees.
Some banks offer interest only payments for up to five years or more.
Tax benefits of 95% investment loans
There are a variety of tax benefits associated with owning an investment property.
A tax professional can help investors to reduce the amount of tax payable. Some typical deductions may include fixtures, fittings and others.
Rental income and 95% investment loans
Typically, investors have large property portfolio and may be receiving a large portion of their income from rent.
However, most banks prefer that you have additional sources of income, as the rental market fluctuates and there may be periods where you do not have tenants and therefore have no income stream.
As such, some banks have restrictive policies which only allow you to include 75% of your rental income. Although, there are some lenders which may accept 80%.
How much is Lenders Mortgage Insurance (LMI)?
Lender Mortgage Insurance (LMI) is applicable for 95% loans. The amount may vary from 1.5% to 3.5%, of the loan amount. Depending on the size of your loan, this can be quite a significant sum!
However, some lenders allow borrowers to include the LMI as part of the loan amount.
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Perhaps you ask yourself, “Why must I do all this song and dance just to get a home loan?” Unfortunately, in today’s economy, mortgage requirements are shifting and changing. Work is difficult to find. Employment stability is iffy at best. Mortgage applications are scrutinized and controlled by authorities and lenders. Borrowers struggle to learn the rules and to present a winning argument. Acquiring the funds for a home purchase is difficult but not impossible.
Fifty years ago, transportation was limited, and workers were not enabled to easily move from place to place. Government enforced work regulations also lacked the power and control of modern times. The banks were local, the population smaller, and people called one another by first names. Workers often entered the job market at an early age, and then remained at the same company until death or retirement released them from the assigned duties. Men and women were proud of their job and their reputation. Missing work was not an acceptable option; neither was defaulting on a loan.
Over time, such long-term jobs have become less frequent. Temporary agencies now sprinkle the employment landscape. Job stability continues to shift and decline. In the search for new jobs, hope, and a promising future, people are forced to acquire new skills. Likewise, lenders also adapt to the new environment. Banks have developed a profile of the ideal borrower, yet they still seek the workers of yesteryear, the men and women who find one job with one company and stick to it year after year. Workers with a history of employment changes are seen as a risk, even a gamble to the lender.
Upon a review the legislation boundaries that require banks and other lenders to take responsibility for granting a line of credit, it is easy to understand the lender’s position in the matter of borrower approval. When it comes to a borrower’s employment history, lenders must make certain that their decisions are based upon the letter of the law.
A creditable, or valued, borrower is generally seen as a person with a stable income and a good debt-to-income financial management ratio. These figures provide the bank or mortgage company with a “big picture” image of a client’s credit worthiness. As with any relationship, time and long-term stability builds trust; it is the same with your lender of choice.
In order to begin the loan process, a mortgage hopeful needs to consider the following bank protocols and best practices:
- The lender prefers that the perspective borrower have a minimum two-month history within their present job field. This time range is hopefully linked to the same occupation and same employer. However some exceptions can be made depending on the bank’s lending policies.
- Given that the worker may be in compliance with occupation and work history requirements yet still be new to a given employer, probationary employment conditions may apply. The typical lender demands that a perspective borrower be free of any probationary employment restrictions.
- The prospective borrower must list and explain in full any job changes that affect their ability to repay a loan.
- The prospective borrower should prepare an accurate and verifiable list of any personal assets that can serve as loan security. This can help the applicant better balance and qualify the income ratio to the loan amount.
- The typical lender does not penalize mortgage applications for progression to an alternative job within the same industry and/or company.
The economy has caused changes in the way people are employed in today’s world. Contractual and part time jobs have become the norm. In many events, applicants with limited time on a new job are still able to evidence a strong work history. When this is supported by verifiable maturity in credit management that is free of defaults on prior loans, most banks will be lineate judgment in the matter.
IRAs, savings accounts, and wise investments also establish borrower creditability. Even when a borrower is weak on employment history, a strong record of sound money decisions can often shift the scales toward a favorable decision. However never mistake, kindness for weakness; when granting credit to any client, all assessors must uphold bank protocols.
Lenders must consider a borrower’s overall financial picture. Supply them with timely and accurate information. Be honest, but careful with word choice. Practice strong work habits. Be thoughtful concerning job changes. Plan for future financial needs. Live within your current means. Such habits will promote a lifestyle that helps satisfy the long-term lending protocols of any bank or mortgage company.
Live in a manner that enables a loan officer to facilitate your transition from dream to home ownership.
Becoming a guarantor for a friend or relative can endanger your most precious assets. Consider the following story:
In 2004, a young girl wanted to purchase a piece of property and build her dream home. She asked her mother to sign as guarantor for a loan in the amount of $380K and her mother agreed. The bank did not advise the mother to seek legal counsel or financial advice, and the mother signed the guarantee. The daughter purchased some land for $150K and saved the remaining money (supposedly) to build her home.
Later that year, it came to the mother’s attention that her daughter was using the loan money for purposes other than home construction. The mother made a trip to the bank to discuss the matter. The loan was not being used the way it was supposed to be and she did not want her daughter to draw on the loan for anything other than building her house. The bank assured the mother that any further drawings would require a receipt.
Shortly after this conversation at the bank, the mother called to make sure that everything was okay with regard to the loan. The bank informed her that they could not tell her anything about the loan for privacy reasons and that she would need to discuss the matter with her daughter directly. Her daughter told her that everything was fine, so the mother put the issue to rest.
In June of 2009, the mother received a notice from the bank informing her that her daughter had defaulted on the loan and that $4000 was owed. The mother immediately called the bank and was told that $380K was now owed on the loan. She also learned that her daughter had been taking money out over and over again without any receipts. The bank further informed her that this type of loan did not require her daughter to produce receipts. None of the money borrowed was used for home construction.
This bank should never have agreed to allow the mother to sign as guarantor. She did not understand the process, and yet they never advised her to seek counsel from a professional. In addition, when the mother had initially complained to the bank about the way her daughter was using the loan, they never told her that the loan did not require receipts. In fact, they assured her of exactly the opposite. The bank had essentially given a young girl a $380K credit card in her mother’s name.
At this point in time, the mother and daughter are no longer behind in paying off the home loan. However, the daughter will never be able to pay the loan off fully until she is well past retirement age. In addition, the health of the mother has been affected, and, as can be expected, so has her relationship with her daughter.
What is the Answer?
This story is very frightening indeed. Most all banks will ask anyone wishing to act as guarantor to obtain legal or financial advice prior to allowing them to sign the paperwork for liability reasons. In this case, since the bank did not do this, they may be subject to legal action.
In order to rectify the situation, the mother should first call the bank and request copies of all the documents associated with the account including the loan application, signed guarantee, and final loan document. Next, the mother needs to educate herself about the Credit Ombudsman guidelines, as well as call them to talk about the situation. The mother would then need to visit the bank with her complaint about their negligence and let them know that she plans to take further action if they don’t help her. Finally, the mother would have to seek legal action if the bank refuses to cooperate.
It is made clear in this tale that the mother has suffered from this arrangement. Her health, her relationships, and her credit have all been affected. However, because the situation has not yet caused the mother direct financial loss, a court may be reluctant to offer sympathy. In fact, she may need to reach the point of direct financial loss before she will be able to successfully battle the bank in court.
As anyone can see from this situation, becoming a guarantor is no simple decision. Signing a guarantee makes you personally responsible for the debt or mortgages in question in the event that your friend or relative is not able to pay. If the payments are passed to you and you can’t afford them, your assets are up for grabs. Before you become a guarantor for anyone, it is essential that you seek financial and/or legal advice to ensure that you are well-educated about the process. In addition, you need to make sure that you have the funds to pay off the loan should you have to. Finally, don’t sign any forms until you are certain that you agree with all of the conditions they impose.
More information about guarantor loans.
Immigrants who have recently moved to Australia can often find it difficult to receive approval for a mortgage. Since you do not have extensive history with income from within the country, the bank will often consider you to be too high of a risk to work with. Thankfully, not all lenders approach the subject in the same way.
Recent immigrants face two primary obstacles that can make it more difficult for them to receive approval for a home loan: a low or absent credit rating and a small or nonexistent deposit.
Your Credit Rating
Credit ratings are national. If you had a good credit rating in the country where you used to live, this information will not be transferred over to Australia. When a lender tries to gain access to your credit history, they will find that the information is lacking, if there is any at all. Most lenders prefer to have a large amount of information to work with. If they don’t have any, they may refuse to work with you at all.
Deposits
This is more of a circumstantial issue, and not all immigrants will have this problem. In many cases, if you only moved to Australia recently, you might not have saved up enough money to make a large deposit on your home loan. It is likely that you already spent a fair amount of your money trying to move to Australia in the first place. You simply may not have the resources.
On the other hand, if you previously owned a house, you are less likely to sell it if you move to another country, and would rather own both homes. Most people use the funds from their previous home to make a down payment on their new home, but immigrants often don’t have this luxury.
Having no down payment, or a small down payment, can have several different effects on how a lender will work with you. Some lenders won’t work with you at all if you can’t make a deposit. Others will charge you a higher interest rate because they consider you to be a higher risk.
In many cases, you will also need to pay for the costs of lender’s insurance. When you make a deposit of 20% or more, the bank has the assurance that they will usually be able to break even if the house is foreclosed and sold by the bank. With a smaller deposit, they don’t have this reassurance. Lender’s insurance compensates the lender if the home is foreclosed. Unfortunately, this means more costs for you.
Mortgage Brokers are Advised
It’s not necessary by any means, but most financial experts would agree that it is a good idea to get in touch with a mortgage broker. In reality, this is true for anybody who is buying a home, but it is especially helpful for people in your situation.
Since it is harder to find a lender who will work with you, a broker dramatically simplifies this process. A broker has access to people in the industry. They know which lenders will work with immigrants, and which won’t. They can speak directly with underwriters and explain your financial situation. They know whether or not a bank offers a fair home loan to people in your circumstances. Since they speak the language, they can interpret the terms of a loan more easily than you can, offering you a level of security that you wouldn’t have otherwise.
Whether or not this is the case in the country that you came from, mortgage brokers in Australia are typically free. They do not work for the lenders, but they receive compensation from them. In some cases you may be required to pay a fee to the broker, but typically this is not necessary.
Advice for Immigrants
There are a few steps that you will need to take in order to obtain a loan from a reputable lender. Before you can fill out any kind of application, you will need an address. In some cases you can use your employer’s address. If you choose to do so, you will need to get permission from your employer. If you have a temporary place of residence, many banks will be willing to use this address as well.
You will also need to set up a bank account. A name, address, employer, and visa status will be necessary in order to accomplish this. Banks are eager to get customers, and it is rarely difficult to set up an account.
Get started on building credit as soon as possible. One of the best ways to accomplish this is by opening up a credit card. Try to use a credit card as though it were your bank account, only buying things that you can afford with the money that you have in the bank. Use your credit card to pay for everything, and pay off the balance every month. This helps you build up credit.
Remember, banks need borrowers in order to earn money. Walking away from a lender never means that you won’t be able to walk back in the next day. As the borrower, you are the one with the power, not the lender.
Learn more about mortgages for immigrants.
There are many mortgage lenders, banks and brokers that now offer low documentation mortgage loans to people who are self-employed, independent contractors or simply prefer the privacy of not declaring their income. Borrowers who are self-employed often having trouble securing a traditional mortgage home loan because they do not have formal income verification. A Low Doc mortgage loan offers those borrowers the flexibility of a stated income or Low Doc mortgage loan based only on a self-declaration of income, along with a credit report and a twenty percent down payment on the property.
If you are applying for a Low Doc mortgage loan, it is important to remember that although you can have bad credit, you most likely will need to have a clean track record for the past twelve months. In other words, it would be best to keep your credit report in good shape for at least twelve months before you apply for a Low Doc home loan. There are also some additional considerations. For example, most Low Doc loans are capped at eighty percent of the appraisal value of the property, for a maximum loan amount of 1.5 million dollars, and Low Doc Loans are often more expensive than traditional full documentation mortgage loans due to the higher credit risk profile.
Even with these limitations, Low Doc or No Doc loans are very useful for borrowers who do not have formal income verification documentation. Borrowers who are independent contractors or self-employed often fit this profile, because they do not have W’2s or tax returns to verify their income. Low doc loans allow banks and mortgage brokers to extend credit to borrowers who have a good credit history, at least for the previous twelve months, without requiring proof of income. Remember that your credit history over the last twelve months is weighed the most heavily, as opposed to your entire credit history.
Acquiring a Low Doc mortgage loan may be the first step to rebuilding a great credit profile. Many people with credit problems find that a home loan, with less stringent guidelines than a traditional mortgage loan, will help them to repair their financial situation and get them back on their feet. In order to qualify for a Low Doc home loan, you may need to first obtain a personal debt consolidation loan to roll your monthly payments together, thereby lowering your overall monthly debt load. A debt consolidation loan for people with bad credit may even keep you out of bankruptcy, while you are working on qualifying for a Low Doc mortgage loan.
Low Doc Home Loans are usually more expensive than traditional home loans due to the higher credit risk profile. These types of mortgage loans are mainly geared for customers who want to purchase a residential house, refinance an existing home or buy an investment property. This is one of the easiest mortgage loans to apply for and is quite fast in the underwriting process due to the limited documentation requirement. As the borrower, you would only need to sign a statement certifying your income. You will also need at least a 20% down payment and a decent, although not perfect, credit rating. Additionally, before applying for a Low Doc loan make sure that there are no delinquencies on your credit report over the last twelve months.
After twelve months of timely mortgage payments, you can apply to roll your loan over to a fixed rate. In order to do this, you must provide proof of your stated income from you initial mortgage documentation. Usually this proof comes in the form of tax returns. The income documentation must at least match the stated income on your original loan documents. If you have a variable rate mortgage, it is important to roll your home loan over from a variable rate to a low, fixed rate, so that you don’t get over your head if the interest rates rise expectantly.
A Low Doc mortgage loan is a relatively quick and easy process to securing home financing. It is very important before you apply for a Low Doc loan to make sure that you have a substantial down payment of twenty percent plus closing costs, as well as a clean credit report for the last twelve months. Low Doc or state income documentation loans are wonderful financial products for borrowers who do not have formal verification of their income. They are also great financial instruments for re-establishing a good credit profile.
If you have bad credit and are self-employed, do not lose hope! With some diligent effort and savings, you will be able to secure a Low Doc mortgage loan from a financial institution, mortgage broker or bank. If you have bad credit or a very high debt ratio, your first step may be to secure a personal debt consolidation loan. A debt consolidation loan will help you to repair your credit rating and lower your overall monthly debt load. With this advantage, you will be in much better shape to qualify for a Low Doc mortgage loan.
What are we talking about when we use the phrase “60% LVR lo doc loan?” There is plenty of jargon in there that the average person might not be fully aware of. The LVR stands for loan to value ratio. To say that a loan has a 60% LVR is to say that the value of the loan is 60% of the value of the home, meaning that you would have saved up a deposit that is worth 40% of the value of the home.
To say that it is a lo doc loan is to say that the borrower either can’t or prefers not to provide proof of their income. Lo doc essentially means that you will not be required to provide as much documentation as you normally would. Rather than offering proof of your income, you will simply declare it.
Putting all of this together, a 60% LVR lo doc loan is a loan where you would save up a 40% deposit and you would declare your income rather than supplying documentation of it. This option is intended for people who are self-employed, where it is difficult to provide reliable documentation of your income.
Are Lo Doc Loans with a 60% LVR Still Available?
For the majority of types of loans, the answer to that question is still “yes.” Lenders who are willing to provide this type of loan are still quite numerous, and include national banks, local banks, and non bank lenders.
Since banks are often hesitant to work with people who will not or cannot supply proof of their income, it is a good idea for a borrower to get in touch with a mortgage broker. A broker is your “inside man” (or woman). They know which lenders will be willing to work with you, and which ones will offer you a fair deal, rather than trying to charge you unfair interest rates by exaggerating the risks of your situation. In many cases, brokers also have special deals worked out with the lenders, allowing them to offer you loans that you wouldn’t be able to receive otherwise.
Since you are providing a 40% deposit, the risks to the lender are minimal. In the unlikely situation that you were unable to pay off your loan, the bank would be forced to take possession of the property and sell it. With a 40% deposit, the odds that they would still make a profit or at least break even are very high. With this level of security, many lenders are willing to offer a loan with terms very similar to the loans they would offer their “normal” customers.
That said, none of this means that lenders will offer a loan to anybody with enough equity. They still prefer not to kick people out of their homes, nor do they enjoy trying to sell homes on the market. Selling homes isn’t a bank’s job, after all.
Do You Need to be Self-Employed?
At this point, you do. In the past, it was possible for PAYG employees to apply for a lo doc loan, but this option is no longer available. Consumer credit protection laws have been introduced that make this type of loan illegal in the vast majority of cases.
Is it Possible to Refinance with a 60% LVR Lo Doc Loan?
In most cases the answer is “yes.” Lo doc loans with an LVR higher than 60% often require lender’s insurance because the lender feels that they are in a position of risk. But with a 40% deposit, the risks are much lower, and you will typically be able to refinance as long as you have a reasonable reason to do so and your financial situation looks good.
Will Bank Account Statements or a BAS Be Required?
In many cases, they will be, but the answer to this question will actually depend on which lender you are working with. There are some lenders who will be willing to offer this type of loan without either form of documentation. These lenders can be quite difficult to find, so you will want to talk with a mortgage broker if you feel that this is a necessity.
That said, it is often a good idea to provide this information anyway. There is no benefit to getting approved for a loan that you cannot afford to repay. Defaulting on a mortgage means that you will lose your home, and that your credit rating will be destroyed for many years to come.
It is also wise to keep in mind that the less documentation a lender asks for, the more likely it is that they will charge you higher interest rates. They are putting themselves at risk by not asking for any kind of verification. Lenders that are willing to do this have to make a profit one way or another.
Learn more about lo doc loans.
In many cases, the amount of money that a borrower needs to spend each month on their mortgage is not the primary problem. Instead, it might be the size of the deposit that they would need to save up in order to avoid higher interest rates and the cost of lender’s insurance. The value of a home rises faster than the size of the average income. This means that it can take several years to save up a 20% deposit. By the time the deposit is saved up, many of the properties that were once affordable are now too expensive to apply for.
Thankfully, there is another option that does not require the borrower to pay lender’s insurance. This is known as a family guarantee. By relying on the support of your family, avoiding lenders insurance is possible without waiting years. As a matter of fact, a family guarantee makes it possible for you to invest in real estate as well.
How it Works
A family guarantee allows a member of you family to use the equity in their own home, or a property that they own, in order to provide security. In this way, you can borrow as much as 100% of the value of the home without having to worry about the extra expenses that you would normally be required to face under these circumstances.
For the process to work, a family member must agree to sign up as a guarantor for part of the value of the loan. In most cases this will be a parent, although a brother, sister, or grandparent certainly isn’t out of the question. They will then decide how much of the loan they will be willing to secure. They can use any amount other than 100%, although the most popular figure is 20%, since this often allows the borrower to avoid lenders insurance.
At this point, the borrower decides which kind of home loan they are interested in signing up for. They then fill out all of the necessary paperwork for the lender to evaluate the borrower’s financial situation. The guarantor will also be required to provide similar information, as well as proof that they are independent of the primary borrower legally and financially.
Benefits For the Primary Borrower
As the primary borrower, you will be able to buy a home sooner than you would otherwise be able to. You can avoid the years that it would normally take to save up for a deposit. You will be able to borrower a much larger amount than would otherwise be possible, possibly as much as the value of the entire home in addition to all the associated expenses. You can either reduce or eliminate the cost of lender’s insurance.
Advantages for the Family Member
As a family member to the primary borrower, the most obvious advantage is that you will be able to help them buy the home that they really want. It is also much safer for you then if you were to simply cosign the loan. Rather than being held responsible for the value of the entire loan, you are only held responsible for the portion that you have secured. You can also be released from the guarantee once the secured amount has been paid off by the primary borrower, or once the equity of the home has grown enough to cover this value.
Benefits to the Bank
You might not care why the bank benefits, but it can be helpful to understand why the family guarantee works in the first place. Banks purchase lenders to protect themselves from the threat of foreclosure. If the borrower’s situation changes and they can’t pay for the loan, the bank is forced to try to sell the home on their own in order to avoid losses. Of course, banks simply are not real estate agents, and can’t sell a home at the full value. A 20% deposit is usually enough to assure the bank that they will be able to avoid any losses if they need to sell the home on their own.
If the deposit isn’t large enough, the bank goes to a lender’s insurance company in order to protect themselves from these losses. Of course, paying for insurance would be a loss from the bank’s perspective, so they pass these costs onto the borrower.
When a family member puts up the equity in their own home against the value of the new home, the bank no longer has any reason to fear losses from foreclosure. The guarantor will be required to cover 20% of the value of the home, and the bank can rest assured that it will most likely break even or turn a profit.
Find out more about family guarantees.
