Limited Guarantee

What Is A Limited Guarantee?

A limited guarantee is where you assist your children out in buying a home by allowing then to access some of the equity you have built up in your home. It means you only secure part of the borrower’s (your child or family member’s) mortgage rather than the entire loan amount and it is limited to a set amount.

So, if ever there is a claim by the borrowers lender, they cannot request any more than this set limit, you are only liable for part of the borrower’s mortgage.

Your child/family member will apply to for a loan to their lender. As part of their application you will also need to complete application forms with your personal details so they can assess your suitability. Please note some lenders may also require income evidence as part of this process.

You will need to provide your property as additional security for the borrower’s loan. This means their lender will take a mortgage against your property.

If you have a loan it is possible for you to stay with your existing lender and the limited guarantee is through a different bank. This would be done so your child member can get the best deal and you are not inconvenienced.

To calculate the limited guarantee, you first need to know the value of the property you child is buying.

It’s calculated as:

Step 1: Calculate 25% of the value of their property
Step 2: If your child has a deposit you can deduct this amount from the above 25%

n.b. the additional 5% is an estimate to cover stamp duty and legal costs involved in the purchase. If stamp duty is not payable, say for example there may be First Home Buyer benefits avaliable, then then you would deduct this form the calculation. It is a bit of an overestimate but a good rule of thumb.

As an example, let’s assume your child has a $20,000 deposit and they are buying a home for $500,000.
House cost: $500,000
Stamp duty and legal costs: $25,000
So, the total cost to buy this property is $525,000

This means without a deposit your child would need to borrow $525,000

  • the limited guarantee will be: $500,000 *25% = $125,000

But, they have $20,000 in savings

In this case they only need to borrow $505,000

  • the limited guarantee will be: $125,000 – $20,000 = $105,000

Keep in mind that every bank has different ways to calculate the limited guarantee and this is a good rule of thumb. Please talk to the Home Loan Guy for more details.

The point from the lenders perspective is that ultimately you the guarantor is liable for you kids home loan should they go into default (as in unable to make repayments). If the lender is forced to, they will sell the kids (aka the borrowers) home first and then you will be responsible for any shortfall that may occur – limited of course to the value of the guarantee amount, and not the full house value.

There is a big fear that banks move quickly to sell the your home to cover the remaining debt but the reality is that banks try everything to solve the problem before taking this drastic decision. They would prefer to first keep the kids paying their loan and then if this is not an option give you repayment solutions to keep you in your home.

The costs are considerable and the lender may not eve get their money back. So they do try to keep people in their home where ever possible. Just look at the way the banks are helping during the Covid-19, it is an extreme example but you can see they are trying.

It is very important that you and the kids have an open relationship about the loans. Make sure, they talk to you is they are having trouble managing you’re their and whether a solution can be found.

Yes, there are options avaliable. The kids can take out a loan with “your” bank, but sometimes this is not the best option for them (eg the interest rates are higher) and they can still use other lenders.

These lenders use what is called a second mortgage against your property. This means your current lender will need to sign off to say this is ok. normally there is no issue and we may need your help to push them faster. But It means your finances do not need to change in any way.

It may sound strange, but it is almost better for you to go this way as the kids bank can not sell you house at all under this arrangement as they are second on the list. You need to be in trouble with your bank as they are the only one that can force a sale.

This is possible as long as the guarantee portion and your loan doesn’t exceed 80% of the value of your property.

Yes, provided you have the equity in your place and provided everyone borrows at the same bank.

What we do for you!Tips for Guarantors

Before you decide to become a guarantor for someone, you need to consider:

Your relationship with the borrower
Your financial situation
Your ability to make repayments
The size of the loan
Getting professional advice
The closer you are with the person you’re guaranteeing, the better chance you have of recovering your money if anything does happen.
Are you fully aware of your financial situation and that of the borrower you’re going guarantor for? The last thing that you would need is to pay off someone else’s mortgage.
It’s essential to ensure that you can cover the costs of the monthly repayments before you commit to the loan. If you need outside help to cover these costs then you may need to reconsider your decision.
You can further reduce the risk exposure to your security by making sure that the loan doesn’t exceed more than 90% of the property value.
The bank may want you to speak with a professional to get independent legal advice and sometimes independent financial advice. Please make sure you understand what you are getting into, and you are comfortable with your decision.

If you’re still not sure about becoming someone’s guarantor then speak with the Home Loan Guy who specialises in guarantor home loans. You can call them on 0412218568 or book a discovery session and find out if going guarantor is right for you.

The kids will be signing up for a 30 year mortgage commitment, but obviously if they repay it quicker the loan does not need to stay in place for 30 years. Obviously, as you only have a limited guarantee they only need to pay down that portion and you can be release.

Equally their property should go up over time and this will speed up the process as they have two factors working for them, the increase in value and their extra repayments onto the loan. Once their loan gets to 80% of the value of their property you can apply to have the guarantee released.

Generally, the guarantee is able to be removed somewhere between 3 and 4 years after the original settlement of the loan (it may be longer in regional areas where the property growth is slower).

You can apply to remove the limited guarantee under the following conditions:

  • The size of your loan is for less than 80% of the value of their home (or less).
  • They have been making regular repayments for the last six months.

Yes, There are a couple of options if you need to get out earlier.

Option 1: Downsizing/tree changing

If you are planning on downsizing from the big family home to a smaller home or apartment this is still possible. The lender can go through a process call “substitution of security”. This means essentially you swap one house for the other and the kids loan remains the same.

As long as you have enough equity in the new please this is something that can be considered.

Or, it is possible for the kids to go alone. If their loan is still greater than 80% of the property value when you apply to release the guarantee they can pay an LMI premium at this time. You may have still helped them get into the property marked and may have significantly reduced the premium