When clients have a limited deposit, in certain circumstances, the bank will allow a direct family member ie a parent to act as a "guarantor" to the property, by using the equity from their existing property to "guarantee" the debt. This helps borrowers who do not have enough deposit to buy a home, and can be a very useful way to avoid mortgage insurance.

Normally, the bank will allow an 80% lend against residential property. For instance, if the property is valued at $500,000, the bank will allow $400,000 in lending. Therefore, if the parents owe $300,000 on their property, there will be $100,000 available to lend against, which can be used in place of the deposit.

We usually set up what is called a "Limited Guarantee" for your parents. What this means is that in the worst case scenario where the client cannot afford to pay their debts, the parents are only obligated for the amount that needs to be guaranteed (ie the amount above 80% which is the difference between the actual loan size and the $300,000 that they owe). There are certain risks involved, such as if the client does not pay their loan, the parents will now be responsible for the loan.

The conditions behind getting a guarantor loan are usually

1. The property should be an investment property, not an owner occupied property. This is to prevent the bank from selling the parent's house in event of a default

2. The parents need to be working (not pensioners or unemployed)

3. The parents will need to afford all of their loans, including the guarantee amount

4. Some lenders will even require the parents to afford the borrower's entire debt, given that they can possibly be responsible for the entire loan.

5. Generally cannot act as a guarantor to allow a borrower to purchase an investment property

However, it is not the case that if the borrower defaults on the loan, that the parent's property will immediately be seized and sold off. Firstly, the primary security (ie the purchase property) will be sold, and any remaining debt can either first be refinanced by the parents, but in the even that they do not qualify for the loan, then the bank will take the drastic step of selling the guarantors property.

The bank may also want to see that the borrowers have income protection insurance and life insurance to ensure there is less risk in the event that the client is unable to work due to injury. We can assist in arranging these types of personal risk insurances.

The decision to act as a guarantor has many implications for both borrower and guarantor, not least for the fact that it affects the borrowing capacity of the guarantor. Notwithstanding this, there is still always the option to release the guarantor once there is sufficient equity in the

In all instances, it is recommended to seek independent legal advice to ensure that the guarantor is aware of their responsibilities, and of course our brokers are able to assist in providing relevant information.