This week our Finance partners have covered off some “need to knows” below.

What is a guarantor?

A guarantor in the property market refers to a third party – usually a parent – who has offered up their property as security in the event you default, and the sale of your property does not cover the borrowed funds.

The benefit of a Security Guarantee is it avoids the need for Lenders Mortgage Insurance when the borrower has less than a 20% deposit to be contributed.

A Servicing Guarantee can also be used to help show serviceability for a loan if the borrower’s income alone is not sufficient however very few lenders will currently allow this apart from between spouses.

When can you remove a guarantor from your home loan?

A guarantor can generally be released once your loan is less than 90% LVR. (or ideally 80% if you want to avoid paying lender’s mortgage insurance)

To remove a guarantor, you’ll need to ensure you can secure the remaining loan amount on your own property, without needing the remaining balance to be guaranteed by a third party.

You may be able to remove a guarantor if your property value has significantly increased, meaning the equity in your home will allow for the removal of your guarantor.

How to remove a guarantor from your home loan

Here are the steps you will need to take to have a guarantor removed from your loan.

• Firstly, you’ll need to contact your bank or broker, who will re-analyse your financial situation.
• If they’re satisfied with where you’re at, they will arrange a bank valuation of your property.
• After considering your current LVR, they can confirm the total loan amount required and your ability to borrow.
• From there, they will submit a partial release or internal refinance. You can apply for a partial release if you have an 80 per cent LVR. However, if you have a 90 per cent LVR, you must complete a refinance, with the loan being subject to LMI approval.

What happens if a guarantor sells their house?

If the guarantor sells their house, the guarantee must be paid back by either the sales proceeds or a savings/equity release loan from the borrowers. It’s important to note here that the net sale proceeds from the sale, would be less the amount that is guaranteed.

Although it will vary depending on the lender, it’s often tough to sell your property if you’re a guarantor. This is something that will need to be carefully considered before entering into a guarantor/guarantee agreement.

Why your mortgage broker should build a strategy for you to remove the guarantor from your home loan

A mortgage broker will provide you with a personalised strategy to remove your guarantor’s guarantee from your home loan as soon as possible. This includes the following suggestions:

• Building equity in the property through regular mortgage repayments above the minimum, this improves the buyer’s equity position.
• Reassessing the property’s value to identify potential appreciation every 12 months.
• Utilising offset accounts or redraw to accelerate debt reduction through reduced interest repayments.

I hope you find this information valuable, as always, if you need any assistance with guarantor loans, or any type of finance, don’t hesitate to reach out.