How to use a guarantor when purchasing a property?

A guarantor is often used when you have a deposit that is less than 20%.

A guarantor won’t necessarily assist you with your borrowing power, when your income isn’t high enough, they will assist you when your deposit is short of the 20% mark.

In this example, a couple is looking at buying a property for $500,000. One way that banks will do a loan with a guarantor is by setting up a first line in the borrower’s name, which is at 80% of the value of the property. The bank will then set up a second line, which will be for the remaining funds where the borrower is short of the 20% deposit. In this case, the 20% required plus the purchasing cost is about $112,300.

The applicants have savings of $50,000 which means they are approximately $62,300 short of where they need to be to avoid mortgage insurance. The shortfall loan of $62,300 is the amount the guarantor is assisting with and will be set up against the guarantor’s property and secured against the property the couple is buying. This line will be in both the applicant’s and guarantor’s names.

In this case, the bank would make sure that the guarantor does have that sort of equity in their home, which the bank checks by doing an evaluation. It’s also important to note that the banks will check that the guarantor is suitable to support the line as they don’t want to be putting the guarantors in any financial hardship.

Finally, it’s important to remember that a lot of banks structure this type of guarantor lending differently. Chat with your broker about the most suitable option for you.