Buying a new home takes commitment and hard work, but it needn’t be out of reach for first home buyers in Victoria.
Despite this good news, as a country, Australia’s goal of home ownership seems to be waning. 68% of Victorian residents own their homes, which is officially our lowest rate of home ownership since in over 15 years. Slightly higher than the national home ownership rate (66%), we’re on par with home ownership in the US, UK, Canada, and our neighbours across the ditch.
If being a first home buyer is part of your Aussie Dream in 2021 and beyond, you may be able to reach your goal faster with government assistance. In this comprehensive guide to the First Home Owner Grant (FHOG) VIC, we’re unpacking everything you need to know about leveraging it to get onto the property ladder.
Table of Contents
- What is the First Home Owner Grant VIC?
The First Home Owner Grant is funded by the state of Victoria for first home buyers that need a boost to get into their own property.
It is a lump sum payment of either $10,000 or $20,000 to help alleviate the financial pressure of those wanting to get into new home ownership.
The First Home Owner Grant VIC also delivers some considerable discounts and works hand in hand with other available government subsidies, depending on your circumstances.
The grant is part of the Homes for Victorians initiative, designed to stimulate the housing market and provide greater access to the property market for regional and metropolitan Victorians. Alongside the exemptions and discounts designed to supplement the FHOG package, potential first home buyers have more buying power to support their effort to get on the property ladder.
In April 2020, in the face of the global pandemic, the state government announced that it would be extending the FHOG for a further 12 months for regional home owners—taking the grant out to June 2021. Victorian Treasurer Tim Pallas stated that: “The coronavirus pandemic is making it even tougher for young people to achieve their dreams (of home ownership), that’s why we’re extending the grant which helps so many regional Victorians.”
How Much Can I Expect From The First Home Owner Grant VIC?
$10,000 For The Metropolitan Melbourne First Home Owner Grant
For first home buyers, the FHOG VIC entitles you to a $10,000 grant on your first residential home up to the value of $750,000. If this home is:
- Valued at less than $750,000, and
- In metropolitan Melbourne, and
- Has newly been built, or
- Is an existing property being sold as a residence for the first time, or
- Is based around a land and building package, and
- Is less than five years old
…then it could qualify for the Metropolitan Melbourne FHOG VIC. We’ll outline all the eligibility criteria in a later section of this guide, to help you establish if you and your family qualify for funding.
$20,000 For The Regional First Home Owner Grant
The regional First Home Owner Grant entitles eligible new home buyers to a $20,000 one-off payment where you’ve signed a contract to buy or build a new home in regional Victoria. If this home is:
- Valued at less than $750,000, and
- In regional Victoria, and
- Has newly been built, or
- Is an existing property being sold as a residence for the first time, or
- Is based around a land and building package, and
- Is less than five years old
…then it could qualify for the regional Victoria First Home Owner Grant.
You may want to speak with us at Blutin Finance, a Finance Broker in Melbourne to find out more about your options.
What Is Regional Victoria?
For reference, regional Victoria is classified by the Victorian government as any property under the governance of a regional council on this list, as well as the alpine resorts of Lake Mountain, Falls Creek, Mt Hotham, Mt Stirling, Mt Buller, and Mt Baw Baw.
What Supplementary Grants Are Available?
Stamp Duty Exemption or Concession
Where your property (or potential property) is valued under $600,000, first home owners don’t pay stamp duty—which essentially saves you tens of thousands of dollars. If your new home is valued at between $600,001 and $750,000—the upper limit of the First Home Owners Grant—you may still qualify for considerable stamp duty concession. To calculate how much stamp duty you may be liable with your property purchase, use this Stamp Duty Calculator.
The concession system is based around your settlement date, with the greatest rate of discount—50%—available to those who settled on or after 1st September, 2014.
Stamp duty exemption and concession are available to all first home owners, regardless of the age or establishment date of the property.
Stamp Duty Exemption or Concession for Families
If you have a dependent child in your care at the time of settlement, and your first home is valued at less than $200,000, you may also be entitled to a duty concession.
You might qualify for first home owner duty concession when buying a land and building package off-the-plan after 1 July, 2017. Off-the-plan concession deducts the cost of post-contract-date construction from the contract price of the residential property. Effectively, you will only be required to pay stamp duty on the improved value of the land plus gross non-deductible costs and completed construction.
Types of Off-The-Plan Concession
Eligibility for the off-the-plan concession falls under two categories:
- Off-the-plan land and building. The term off-the-plan land and building refers to a new home owner’s contract to buy land and build a new house, unit, or apartment on that section.
- Off-the-plan refurbished lot. The term off-the-plan refurbished lot refers to a first home owner’s contract to buy an existing building and refurbish it for the purpose of living in it. Converting a warehouse into a residential apartment—like the New York loft-style apartment—would fall under this category. Only the initial property owner who registers the refurbishment is eligible for this type of concession, which means it doesn’t apply to future home buyers or under the terms of a sub-sale.
Pensioner Exemption or Concession
If you are over the age of 66—between 1 July, 2019, and 30th June, 2021—and buying your first home, you may qualify for a pensioner concession. The pensioner concession is not available in conjunction with a first home buyer’s duty exemption or concession, so we recommend doing your due diligence to establish which is more beneficial in your circumstances.
The 50% pensioner concession applies where your first home is valued at between $330,001 and $750,000—the maximum property value under the First Home Owner Grant initiative. If your first home is valued at up to $330,000, qualifying home buyers will receive a full exemption from duty.
Eligibility for Pensioner Exemption or Concession
In addition to the eligibility criteria we outline later in this guide, those wishing to apply for pensioner concession will need to:
- Buy their first home at market value
- Reside in the home
- Hold a state-recognized concession card at date of settlement
Property Eligibility for Pensioner Exemption or Concession
The property you intend to buy must also be:
- Valued at less than $750,000, and
- Be newly built, or
- Be an established property, or
- Be built under a house and land package, and
- Be completed within three years of your settlement date
Combined Eligibility for Pensioner Exemption or Concession
Where you are buying your first home with someone else, and at least one of you is a pensioner, that person will be able to apply for the pensioner exemption or concession. If you are buying your first home and you are both pensioners, each party is buying a part interest in the home. Your eligibility and entitlement under the pensioner exemption or concession subsidy will be based around the interest you hold in the property.
For example, if you are buying a 50% interest in a first home valued at $650,000, the value of your interest is $325,000—under the full exemption threshold. This means that you will be exempt from paying duty on your interest in the property, and save yourself a 50% share of $34,070 (at date of writing). If you are buying your first home with someone who does not qualify for pensioner concession or exemption, they will still be liable for 50% of the Victoria stamp duty. It’s important to note that you can only qualify for the pensioner exemption or concession one time.
The Young Farmer Concession
The Young Farmer concession is available to you if you are under the age of 35 and purchasing your first farm. It is not available in conjunction with the PPR concession—Primary Place of Residence concession—so we recommend doing your due diligence to establish which is more beneficial in your circumstances. If you require assistance, we can support you in getting the answers you need and keeping more of your hard-earned savings.
Eligible first home buyers aged below 35 who qualify for the Young Farmer concession may be entitled to:
- Exemption from duty on the first $300,000 of farm value, when the farm is valued at under $600,000, or
- Concession where the value of the farm is between $600,000 and $750,000.
Can you also get the First Home Bonus?
The First Home Bonus is available in conjunction with the First Home Owner Grant where you entered into your contract prior to 1 July, 2012, and it was your first home purchase, and it meets the criteria required for the FHOG VIC.
To qualify for the First Home Bonus, you must have:
- Entered into your first home contract prior to 1 July, 2012, and
- Not received the duty exemption or concession for families, and
- Have purchased either an established residential property, or
- A new construction in metropolitan Victoria, or
- A new construction in regional Victoria.
The First Home Bonus ranges from $2,000 to $13,000.
What Are The Eligibility Requirements of The First Home Owner Grant VIC?
The eligibility requirements of the FHOG VIC can seem daunting for first home buyers, but they can deliver a considerable financial boost onto the property ladder. As such, it’s worth taking the time to understand what you could be entitled to, and how the properties you consider impact your entitlements under the FHOG initiative.
First, a refresher on the criteria your new home must meet in order to be eligible for the First Home Owner Grant:
- Valued at less than $750,000, and
- In metropolitan Melbourne (to qualify for the $10,000 metropolitan FHOG VIC), or
- In regional Victoria(to qualify for the $20,000 regional FHOG VIC), and Be newly built, or
- An existing property being sold for the purpose of living in, or
- Be a land and building package, and
- Be less than five years old
In order to be eligible for the FHOG VIC you must meet the criteria laid out by the Victorian government. You and your spouse/partner must:
- Not have received the FHOG in Australia
- Not have owned a residential property—either individually or together—prior to 1 July, 2000
- Not have lived in a home owned (or part-owned) by either you or your spouse / partner for more than 6 months, on or after 1 July, 2000
Under these initial criteria, if you owned a residential property after 1 July, 2000, but can demonstrate that you did not live there—for example, if it was a rental property—you may still be eligible for the FHOG VIC. The crucial part of the equation is your real estate ownership status prior to 1 July, 2000—regardless of your relationship at that time—and your living situation after 1 July, 2000.
If your spouse or partner does not intend to apply with you for the FHOG VIC, they will still be tested against the above criteria.
In addition to the above criteria, to be eligible for the FHOG VIC applicants must be:
- Over the age of 18 at date your contract is signed (some flexibility is afforded), and
- Australian citizens or permanent residents (see below), and
- Intending to occupy the home as your primary place of residence (PPR) for a minimum period of 12 months, with this period commencing within 12 months of signing a contract for the property or completion of construction, and
Citizenship and Residency
To qualify as a citizen or permanent resident of Australia, you will need at least one of the following:
- A permanent visa under s30(1) of the Migration Act 1958, or
- To be a New Zealand citizen holding a special category visa under s32 of the Migration Act 1958, and be in Australia at the settlement date, or
- A passport issued by the Australian government in your name, if you were born on or after 20thAugust 1986, or
- A full birth certificate issued by an Australian Registry of Births, Deaths, and Marriages office, if you were born in Australia prior to 20thAugust, 1986, or
- An Australian citizenship certificate in your name if you were born outside Australia.
Exemption For Defence Force Members
Members of Australian Defence Forces may fail to meet the residency requirements of the First Home Owner Grant where they have been deployed to other states or overseas during the qualification period.
In this instance, the Australian government have created a residency exemption for those currently serving in the Australian Army, Navy, or Air Force. If you are an active member of the Defence Forces and are enrolled to vote in the state of Victoria, you can apply to the State Revenue Office for exemption from the residency prerequisite of the First Home Owner Grant application.
How Do I Complete The First Home Owner Grant Application Form?
The process of applying for the First Home Owner Grant isn’t as overwhelming as you might think. In fact, you may not have to lift a finger.
In many cases, your mortgage broker can lodge your First Home Owner Grant application for you. If you rely on the FHOG VIC for settlement or first draw down payment, check with your mortgage broker or lender early to confirm if they are handling the application process on your behalf.
Submitting Your First Home Owner Grant Application
If you are sure your lender or mortgage broker is not submitting an application as your representative, you’ll need to lodge your application for yourself:
- Determine your eligibility
- Compile your supporting documentation. You (and each applicant) must provide four documents—at least one each from the following categories:
- a. Primary ID: A birth certificate issued by the Australian Registry of Births, Deaths and Marriages, an Australian passport, an Australian citizenship certificate, a New Zealand passport, or another country’s passport plus a permanent residence visa (or evidence of permanent residency)
- b. Australia-issued Photo ID: Driver licence, passport, firearm licence, or 18+ ID.
- c. Proof of Australian residence: Medicare card, motor vehicle registration, Centrelink card, or Department of Veterans’ Affairs card.
- d. Proof of current address: A utility bill (water, gas, power, etc.), insurance policy, tenancy agreement, payslip, tax assessment, or mortgage papers.
- e. Situational evidence: Depending on your relationship or personal status, you should include a copy of your marriage certificate, divorce certificate, a death certificate for your spouse if you are widowed, or a change of name certificate.
- Complete the application. Several supporting documents are available on the State Revenue Office Victoria website, including a comprehensive lodgement guide. Print your application and complete all relevant parts in either blue or black pen—no other colours can be used. Remember to sign your application.
- Submit your application. An approved agent can do this on your behalf, or you can package it with all supporting documentation and post it to:
State Revenue Office Victoria
GPO Box 1641
Melbourne VIC 3001
Your application needs to be submitted within 12 months of signing a contract or completion of construction.
What Happens Next?
If you are approved for the First Home Owner Grant, the date on which the grant is paid will depend on several key factors:
- Whether you are building or buying a newly built house
- Whether you applied directly to the State Revenue Office (SRO) of Victoria or through your agent
If you are not approved for the grant, you can seek a review of your application and lodge a written objection to the SRO.
The First Home Owner Grant VIC: Frequently Asked Questions
I have bought an established home. What first home ownership grant am I eligible for?
The established home buyer is not eligible for the FHOG. But if you meet the other criteria we’ve listed above, you may be entitled to some assistance or concessions. The First home buyer duty exemption or concession might be available to you for your established property. Read more about first home buyer duty exemption here. You may also qualify for PPR concession.
If you signed a contract for your established home before 1 July 2013, you could also be eligible for up to $7,000 through the earlier version of the First Home Owner Grants program.
How long do I have to apply for the First Home Owners Grant?
You must submit an application within 12 months of signing your contract or completing construction on your new home. To be eligible for the regional Victoria First Home Owners Grant, contracts must be signed and building must have started prior to 30th June, 2021.
I was only granted $10,000 under the regional Victoria First Home Owners Grant. Why didn’t I get the full $20,000?
If you signed a contract for your first home in regional Victoria prior to 1 July, 2017, you are only eligible for $10,000 through the First Home Owners Grant VIC. The settlement date is irrelevant in this instance.
How do I know if my mortgage broker or lender is handling my FHOG VIC application?
If Blutin Finance are your mortgage brokers, we will handle the application process on your behalf. If you aren’t partnered with us to buy your first home, you’ll need to ask your broker or lender to be sure. Always make sure your application hasn’t been submitted on your behalf, prior to submitting it yourself.
What is PPR concession, and do I qualify?
Principal Place of Residence concession is available to eligible property owners who intend to live at the property for more than 12 consecutive months, within 12 months of the property settlement date.
To qualify, you need:
- To own a property valued at $550,000 or less, and
- Intend to use the property as your principal place of residence for more than 12 continuous months, and
- Intend to move into the property within 12 months of settlement, or
- Where you hold a part-interest in the property, another part-owner meets these criteria, and
- The property houses a building designed or constructed for residential purposes and is legally able to be used as a principal place of residence.
There are several discretionary clauses within the PPR concession which influences how property owners can meet the criteria. For example, if you hold a part-interest in a property, and meet the above criteria, but only use the property as your PPR for a continuous 6 month period, and another part-owner of the property (who also meets the criteria) uses it as their PPR for a continuous 6 month period, the SRO deems you to have met the qualifying criteria.
If part of your true blue Australian dream is to own your own home, we hope this comprehensive guide has made it that little bit easier.
With assistance from the First Home Owner Grant (FHOG) VIC, you can leverage your entitlements to get your foot on the property ladder.
When you’re in the market for the purchase of your first home in Victoria, an experienced mortgage broker can streamline the process. With access to premium mortgage products and financial solutions, Blutin Finance is here to assist you.
Are you looking to take on the role of a guarantor? Do have questions like; what is a guarantor home loan? Or, what’s a guarantor mortgage? Well, there is more to the role of a guarantor than you may know.
A guarantor is a person that promises to pay the debt of a borrower if the borrower is not able to fulfil the loan obligations. However, the role of the guarantor isn’t as simple as the definition makes it sound. In Australia, a guarantor has to meet specific criteria before they can assume the role.
As a guarantor, you need to know the various kind of guarantors for mortgages, how they work, the guarantor loan requirements, the risks involved, and more. Knowing all these allow you to make informed decisions since you understand your role perfectly well. The guarantee should also learn everything about guarantor mortgages and guarantor home loans since they are not the primary beneficiaries of the loan but may have to pay back the loan. This article will cover a wide range of information regarding the responsibilities, pros and cons of being a guarantor to a home loan.
Table of Contents
What is a Guarantor, and what do they do?
A guarantor is a term used in the financial world to describe a person that promises to pay the debt of a borrower if the borrower is not able to fulfil the loan obligations. Guarantor on loan put forward their assets as collateral when the borrower is accessing a loan. In certain cases, the term guarantor is used interchangeably with the term surety.
Understanding the role of a guarantor
Certain things guide the guarantor. In Australia and with most lenders, a guarantor has to be an Australian Citizen or a permanent resident and must be above 18 years but below 65 years. This is because only a few lenders accept retirees and older people as guarantors in a mortgage deal. The guarantor needs to have a good credit history. Some lenders would look into the income of the guarantor to make sure they earn enough income to cover the loan payments in case the borrower defaults. Furthermore, if the borrower makes late payments, the guarantor might get penalised for extra interest owed.
In the Australian real estate market, having a guarantor can be the only way that allows borrowers to borrow 100% of the property value without any deposit saved. The lenders use the property the borrower is buying and the guarantor’s property as securities for the mortgage. The guarantor also has the power to limit the amount he/she guarantees.
Since banks assume that the value of the guarantee reduces the risk of the borrower, they treat the mortgage like a loan amount of 80% Loan to Value (LVR) ratio and therefore most lenders waive the requirement to pay Lender’s Mortgage Insurance (LMI). As a guarantor, you are liable for the part of the loan you agree to guarantee. If the borrower fails to meet the loan obligations and defaults, you will be responsible for the amount you initially agree to guarantee. Thus, it would help if you understood that you could be at great risk as a guarantor, depending on the number of asset-exposure you have on that mortgage.
What are the types of guarantees?
A guarantor loan helps the borrowers reach their goal of owning a house easier. However, as a guarantor, you have to understand which kind of guarantee you are going to be. When it comes to lending, in general, there are two types of mortgage guarantees.
In this case, the guarantor leverages his/her real estate properties as additional security to help the borrower access the mortgage. However, if the guarantor already has a mortgage, then the lender might take a second mortgage on the property.
Most of the time, the guarantors in this scenario are parents helping their children with the repayment of the loan. The lender usually looks into the income of the parents to work out if they can service the total loan amount and not just a portion of it.
What is a family security guarantee?
A family security guarantee is when a family member, mostly parents, use the equity in their property to help their children buy a new home. With a family guarantee loan, borrowers can buy properties without the need for a large cash deposit savings. In certain cases, the borrower doesn’t need much savings to access this type of loan.
When using a family security guarantee, you can avoid paying Lenders Mortgage Insurance (LMI) since the lender will treat your borrowing as if you are borrowing 80% of the value of the purchased property. Since you are offering more than one security (the equity in your parent’s property plus your new property), you are offered to borrow the full purchase price plus any extra fees or charges that are associated with the purchase.
The security guarantee provided by your family is limited to the guarantee amount. This means that the family guarantor is not required to pay the full loan amount to the lender, nor will they start making repayments on a new loan. Rather, if the borrower has issues with the loan repayment and it gets to a stage where the lender needs to recover the funds, the lender can and has the right to recover the guarantee amount from the guarantor.
A mortgage is established on the guarantor’s property as part of the guarantee loan process. Hence, limiting the options your parents would have if they were planning to sell their property. However, if parents are considering releasing equity for other acquisitions or helping siblings buy their own properties, it can be possible. All of this depends on the lender’s policy at the time of the mortgage agreement.
What are the eligibility requirements to be a guarantor?
When selecting a guarantor, you need to choose someone whom you can trust and someone who trusts you in return. Most borrowers turn to their family members, friends, or business associates when selecting a guarantor. However, a guarantor must satisfy certain requirements before a lender can approve them as a guarantor.
The guarantor eligibility requirements include but not limited to;
- Must be an Australian citizen or be an Australian permanent resident
- Have a good personal credit history
- Have a stable income and equity in their property
- Be above 18 years and not more than 65 as most lenders don’t accept retirees or older people as guarantors.
Who can be a guarantor?
A guarantor is a great way to help a friend or family member purchase their home sooner therefore in most cases, guarantors are limited to immediate family members, friends, or business associates. Usually, the guarantors are parents but can also be grandparents or siblings. Some lenders approve extended family members and also ex-spouses to serve as guarantors to a loan. However, “who can be your guarantor?” depends mostly on the choice of the lender.
How do Guarantor Loans work?
Guarantor loan requirements
There are certain guarantor obligations and guarantor requirements needed before you can access this type of loan. They include:
- The guarantor age must be over 18 years and in some cases guarantor age limit will be 65 years old
- Must have enough equity in the property
- Some lenders may ask for the guarantor to have a stable source of income
- Must be an Australian citizen or be a permanent resident of Australia
- Must have excellent personal credit ratings. As such, the lender will like to see a credit check is done on the guarantor to confirm their credit standing.
- The guarantor needs to provide documents showing that they can pay off the loan, or the amount they guarantee. Some of the accepted documents can include proof of equity and bank statements.
Will a guarantor home loan cost more?
The guarantor home loans could cost more compare to a loan with deposit. It may have some fees and charges associated with it. When you use a guarantor loan to avoid paying LMI instead of saving up a deposit, then the mortgage could end up costing you more in the end. The main reason is due to paying interest on a higher amount of loan compared to say, a 20% deposit with a loan of 80% LVR.
What if my parents have an existing mortgage on their house?
Your parents can still serve as your guarantors even if they have a home loan, as long as they have sufficient equity. Some lenders can still obtain a guarantee on their properties using a second mortgage. However, keep in mind, the guarantor needs to declare all the loans on their property. The loans may include both commercial and residential loans. Failure to declare the existing loans might lead to rejection of your application before settlement.
Are you able to sell your house if you are a guarantor?
As a guarantor, you should understand the risks you are assuming when you agree to help someone buy a home. Thus, before you sign the guarantor agreement, keep in mind that you might not be able to sell your property or access a mortgage on it. Essentially it may mean that you may have to delay your goals of selling your property as it may not be possible as long as you are a guarantor.
To be able to release the guarantor, if your current loan balance is over 80% LVR (loan to value ratio), find out if you can increase your savings to cover the remaining funds to bring the loan balance to 80% LVR. Alternatively, you contact Blutin Finance – mortgage broker in Melbourne and we can order a valuation from different lenders to find out the value of your property and ultimately working out the right LVR.
In general, with some lenders, you can replace your guarantee with the same amount in a term deposit. This means that if your guarantee was $300,000 then you will have to give the lender $300,000 term deposit that they can hold as security. You will still be accumulating interest on the term deposit whilst providing the guarantee. If you determine that you can achieve that, then you can go ahead and sell your property.
What if my parents are retired?
The age requirement for serving as a guarantor is between 18 and 65. This is because most Australian banks may not accept a security guarantee from the elderly or retired guarantor. The retired guarantors no longer have a stable source of income that is needed to play the role.
However, not every lender assesses guarantors with that criteria. Some of our lenders can accept guarantors that are retired, pensioners, or other self-funded retirees over 65 years. As long as the retired parents seek independent legal advice before signing the loan offer, some of our lenders may allow them to serve as guarantors.
What are the benefits of Guarantor Loan for buyers?
Guarantor loans offer various benefits to the borrowers, depending on your financial goals and current circumstances. With a guarantor loan, you can enjoy some benefits such as;
- Avoid paying the Lender’s Mortgage Insurance (LMI): a key benefit of obtaining a guarantor on your home loan is that it might help you avoid paying the LMI. The lender’s mortgage insurance is a one-off premium fee that you will pay to the lender. The fee is to help protect the lender against financial losses in case you are unable to meet the mortgage repayment requirements. Banks and lenders generally require the borrowers to pay the lender’s mortgage insurance on loans where the borrower cannot put in a deposit of at least 20% of the property’s value.
- The guarantor loan allows you to buy a property as soon as possible since you don’t need a deposit
- Gives you access to the property market faster
- Allow you to access better loans that come with more favourable rates
- It also helps consolidate minor debts like the credit cards when you purchase a property under this loan type
Who is a guarantor mortgage suitable for?
The guarantor home loan is not designed for all types of borrowers. It is most suitable for the following set of borrowers;
- Borrowers with a low income (in case of income guarantor)
- Borrowers with weak credit score
- Borrowers with zero or little deposit. These are usually first-time buyers
How much can I borrow?
The guarantor loan can help especially the first-time buyers and people with poor credit scores to access a mortgage. Hence, with the guarantor loans, you can borrow up to 100% of the property purchase price or even slightly higher. Some lenders on the panel with Blutin Finance allow you to borrow up to 105% of the purchase price of a property. Although some of the lenders will only hand out 100% of the property value as a mortgage in case of refinancing. The extra sum will help you cover for the expenses that come with buying and moving into a new home.
Specifically, the amount you can borrow with the help of a guarantor largely depends on the purpose of taking the mortgage. Most lenders give;
- 105% of the total cost of construction and land value for people that wish to build a home
- 100% of the property value for refinancing purposes
- 110% of the house value for debt consolidation and purchase of a property
- 105% when it comes to property investment purchase
Ideally, there is no maximum size for the mortgage you can access. However, most lenders require you to meet additional credit criteria if you wish to borrow over $1 million.
What are some of the risks for the Guarantor?
Guarantor loans can be risky for the guarantors. This is because the guarantor will be liable when the borrower fails to make the repayments. They stand a chance to lose their property completely when the borrower fails to meet their obligations and make repayments.
In situations where guarantors don’t have the savings to pay for the debt, they may have to apply for a second mortgage on their property or get a second loan. If these avenues have been exhausted, the bank or lender doesn’t have a choice than to sell the guarantor’s property and take enough of the money to cover the guaranteed amount. The remaining funds from the sale of the property will be returned to the guarantor. As the guarantors are only liable to pay the amount they agreed to guarantee, once they pay that amount, they are no longer bound to any further liabilities.
Should I act as a guarantor?
You shouldn’t act as a guarantor if you don’t want to. Choosing to become a guarantor is a big decision. Hence, you need to seek independent legal and financial advice before you decide to be a guarantor. You should also ask yourself a few questions to determine where you stand.
- Is the limited guarantee too much for you to cover, or can you cover it with ease?
- What are the set conditions that would make you liable to pay?
- Do you attest to the character of the person you are standing for?
If you don’t want to serve as a guarantor but wish to help your child get their home, you may wish to consider other ways of helping such as cash gifting or loan.
When can I remove the guarantee?
There are certain conditions that you should meet before you can apply to remove the guarantee on a mortgage. Some of the conditions include:
- The borrower affording to repay without needing help (in case of income guarantor)
- The balance of the mortgage is equal or below 80% of the property value (without paying the LMI)
- The borrower hasn’t missed any payment in six months
After any of these conditions are met, the guarantor can apply to remove the guarantee. Furthermore, the borrower can apply to remove the guarantor if he meets the conditions.
Are there other protections for guarantors?
Yes, there are. According to the Australian Code of Banking Practice (COBP), guarantors can enjoy the following protection:
- They will be given at least three days to review the guarantee papers and to consider their duties as guarantors before agreeing to the role and returning the documents
- They will be given cooling-off period once they sign the agreement
- They will be asked to seek independent legal counsel before signing
- The bank or lender will notify the guarantor if the borrower gets into any financial difficulty or if the circumstances change for the worst
- The bank has to start collecting assets from the borrower before moving to the guarantors during this process.
Do I need expert advice if I’m a guarantor?
It is recommended to consult an expert mortgage broker when you become a guarantor. This is because there are several things to consider when applying for this type of loan. Seeking expert advice, especially from Blutin Finance, will make it easy to access the lenders and help you stay within your liability limit. Furthermore, Blutin Finance will help you if and when you decide to remove the guarantee.
Apart from speaking with a mortgage broker, we highly recommend seeking advice from an independent solicitor and financial planner. In some circumstances, getting advice is mandatory.
Example of a Guarantor loan
Michael has been living on his own for a few years now and feels the time is right to buy his home as he gets ready to have a family. He finds an exquisite three-bedroom house in a nice neighbourhood. The property is worth around $700,000, and he knows that if he doesn’t act fast, he will likely miss out on the house to someone else. However, the stumbling block is that he doesn’t have enough savings to cover the deposit that would qualify him to get a home loan due to the monthly rents he pays. He needs to come up with 20% of the property purchase value before he can qualify for a mortgage.
His parents decide to come and help. They are both working and their house is paid off. This makes them qualified to serve as his guarantors. The parents agree to serve as guarantors and offer their house as security to access the loan.
Michael can receive 105% of the purchase price of the property to cover the mortgage and other expenses such as stamp duty and conveyancing fees. Since it is a guarantor loan, Michael doesn’t have to pay the Lenders Mortgage Insurance (LMI), a one-off premium he would have paid.
How will having a guarantor help your loan application?
A guarantor will help your loan application by:
- Ensuring that you buy your house immediately since you don’t need a deposit to access the loan
- Get discount interest rates from most banks and lenders similar to the borrowing of 80% LVR
- Save money by avoiding the LMI premium
- And limit the size of the guarantee
Are there any other ways my family could assist me to buy a house?
If your parents don’t feel comfortable being your guarantors or you feel that the guarantor home loan doesn’t seem right for them, there are other ways your family can help you.
- Your family can help give you money to help towards your deposit. You can pay them back according to any agreement you have with them.
- They can let you move back in with them to reduce your expenses. At home, you don’t have to worry about rent and bills, which would help you boost your savings towards a deposit.
- Your family can co-sign a loan with you and become a co-owner of the property. This means that they will own the property as well as share the loan repayment responsibilities with you without putting their house as collateral.
- They can gift you part or all the deposit you need.
What happens if your guarantor dies?
If your guarantor dies, the debt doesn’t end with them. The estate of the guarantor will remain liable for the debt.