Security Guarantee Loans: Enhancing Home Ownership with Guarantor Support
Security guarantee loans offer a practical pathway to home ownership by allowing a family member or related party to provide additional property equity as security for a loan. This approach can help borrowers secure a larger loan amount, avoid costly Lenders Mortgage Insurance (LMI), and potentially access better lending terms.
Understanding Security Guarantee Loans
A security guarantee loan involves a guarantor—typically an immediate family member—who supports the borrower’s home loan application. Unlike a co-signer, a guarantor under a security guarantee does not assume responsibility for repayments unless specifically required. Instead, the guarantor provides additional equity from their own property. This extra security helps reduce the borrower’s Loan-to-Value Ratio (LVR), which in turn may eliminate the need for LMI.
How Does It Work?
With a security guarantee, the borrower’s property remains the primary security for the loan. However, by utilising a guarantor’s property equity, lenders are offered further assurance. For example, if a borrower is purchasing a property valued at $900,000 and needs to borrow $855,000, the resulting LVR of 95% would normally trigger LMI. With a limited guarantee from a family member’s property equity, the effective LVR can be lowered, potentially saving tens of thousands in insurance costs.
A Practical Example
Consider a scenario where a couple purchases a $1,000,000 home. After accounting for stamp duty and legal fees, the total cost rises to approximately $1,040,000, leaving a shortfall of $990,000. To avoid LMI, the guarantor—acting through a limited security guarantee of around 19%—supports the loan. Over time, with property appreciation and consistent repayments, the couple’s LVR decreases significantly. Once sufficient equity is built (typically when the LVR drops to 80% or below), the guarantor can be released from the obligation through a formal reassessment process.
Key Benefits
Avoidance of LMI: By reducing the effective LVR, borrowers can bypass the additional expense of LMI.
Access to Competitive Rates: A lower LVR often leads to more favourable interest rates.
Increased Borrowing Capacity: The guarantor’s equity can enable borrowers to secure loans for the full purchase price plus associated costs.
Considerations for Guarantors
Before entering a security guarantee arrangement, guarantors should be aware of several important factors:
Liability Limits: Guarantors can often limit their guarantee to a specific amount rather than the full loan amount.
Release Process: Once the borrower demonstrates the ability to service the loan independently and builds sufficient equity, the guarantor’s responsibility can be removed.
Legal and Financial Advice: It is essential for guarantors to seek independent advice to understand the potential impact on their own borrowing capacity and financial security.
Rights and Protections: Guarantors are entitled to a review period and should be fully informed about any changes in the loan agreement that might affect their obligations.
Conclusion
Security guarantee loans provide a viable solution for borrowers who have strong income streams but face challenges with deposit requirements. By leveraging the equity of a family member’s property, these loans not only facilitate home ownership but also offer significant savings by avoiding LMI and securing better interest rates. Both borrowers and guarantors should carefully evaluate the terms, seek professional advice, and fully understand their rights and responsibilities to ensure a secure financial future.