Going Guarantor: Unlock The Door To Your Dream Home As An Australian Expat
As an Australian expat, you may be exploring ways to buy a property back home. One popular option for expats to own property in Australia is going guarantor. It is essential to understand the benefits, risks and requirements that come with applying for a mortgage in Australia by going guarantor. Let’s dive in!
What is a Guarantor?
A guarantor is a person, usually a family member, who offers their property as security to help you secure a home loan. The guarantor does not have any ownership rights to your property but is responsible for the loan in case you default on your repayments.
Why Consider a Guarantor?
There are several reasons why you may want to consider having a guarantor when applying for a home loan. This can include:
- Increased borrowing power: With a guarantor, you may be able to borrow more than you would be able to on your own, as the lender will take into account the guarantor’s assets and income.
- Avoid Lenders Mortgage Insurance (LMI): LMI is a fee that lenders charge when the borrower has a deposit of less than 20% of the property’s value. By having a guarantor, you may be able to avoid paying LMI altogether.
- Improved interest rates: With a guarantor, you may be able to secure a lower interest rate, as the lender sees the loan as less risky.
- Improve your creditworthiness: If you have a limited credit history, having a guarantor can help you demonstrate to lenders that you have the support of someone with a strong credit history.
- Greater chance of loan approval: With a guarantor, you may be more likely to have your loan application approved, as the guarantor provides an added layer of security for the lender.
Get a free Australian mortgage assessment today.
Pros and Cons of Going Guarantor for Australian Expats
Understanding the pros and cons of guarantor is essential before making a decision. Let’s weigh the benefits against the potential drawbacks.
Pros
- Increased borrowing capacity: With a guarantor, you can borrow a higher amount, sometimes up to 100% of the property value. This can help you buy your dream home without having to save for a large deposit.
- Potentially lower interest rates: Lenders may offer lower interest rates if a guarantor is involved, as the risk associated with the loan is reduced.
- Lender’s Mortgage Insurance (LMI) savings: When you borrow over 80% of the property value, LMI is typically required. However, with a guarantor, you can avoid paying LMI, potentially saving thousands of dollars.
Cons
- Risk to the guarantor: The guarantor takes on the risk of having to repay the loan if you default on your repayments. This can potentially lead to financial strain and even the sale of their property to cover the debt.
- Limited property choices: Some lenders may impose restrictions on the type and location of properties you can purchase with a guarantor loan.
- Possible negative impact on future borrowing: Having a guarantor loan may affect the guarantor’s borrowing capacity, limiting their ability to obtain future loans.
What Happens If a Guarantor Sells Their House?
If a guarantor sells their house, it may impact the home loan that they have guaranteed.
When a guarantor agrees to guarantee a loan, they are providing their assets as security. This means that if the borrower defaults on their mortgage repayments, the lender may seek repayment from the guarantor.
If the guarantor sells their house, the lender will typically require a replacement guarantee, as the security that was originally provided is no longer available. The guarantor may need to provide a cash deposit or use another asset as security to replace the guarantee.
Other impacts on the home loan may include the following.
Releasing the Guarantor
If a guarantor decides to sell their house, they can be released from their obligations. This typically occurs when the borrower has built up sufficient equity in their property or can demonstrate an ability to service the loan independently.
Impact on the Borrower
When a guarantor sells their house, the borrower may need to refinance their loan, find another guarantor, or provide additional security to the lender. This process can be time-consuming and potentially costly.
Get a free Australian mortgage assessment today.
Guarantor Home Loan Calculator: Estimating Your Borrowing Potential After Going Guarantor
A guarantor home loan calculator helps you estimate how much you can borrow with a guarantor. By putting in details such as your income, expenses, and the guarantor’s property value, you can get an approximate borrowing amount for a guarantor home loan.
Factors Affecting Your Borrowing Capacity
When applying for a home loan with a guarantor, several factors can affect your borrowing power. Here’s how each of the following points can impact your borrowing power with a guarantor:
- Your income and expenses: Your income and expenses will be taken into account when assessing your borrowing power. The lender will want to ensure that you have enough income to make your mortgage repayments comfortably. With a guarantor, your borrowing power may be increased, as the lender will also consider the guarantor’s income and assets.
- Credit history: Your credit history is an important factor in determining your borrowing power. With a guarantor, your credit history may be less of a factor, as the lender will also consider the guarantor’s credit history. If the guarantor has a strong credit history, this can help offset any weaknesses in your credit history.
- The guarantor’s property value and equity: The value of the guarantor’s property and the amount of equity they have can also impact your borrowing power. The lender will take into account the guarantor’s assets and income when assessing the loan application. If the guarantor has a valuable property with a significant amount of equity, this can help increase your borrowing power.
- Lender’s policies and criteria: The lender’s policies and criteria can also impact your borrowing power. Each lender has different policies and criteria for assessing loan applications. With a guarantor, the lender may have more lenient policies, as the guarantor provides an added layer of security for the loan. However, it’s important to note that each lender will have different policies and criteria, and it’s essential to choose a lender that is suitable for your financial situation and needs.
Tips to Maximise Your Borrowing Power
When applying for a home loan with a guarantor, there are several tips you can follow to maximise your borrowing power. Here’s an explanation of each tip:
- Reduce your debts: To maximise your borrowing power, it’s essential to reduce your debts as much as possible. Lenders take into account your existing debts when assessing your ability to make mortgage repayments. By reducing your debts, you can demonstrate to the lender that you have a lower risk of defaulting on your repayments. This, in turn, can increase your borrowing power, as the lender may be more willing to lend you a larger amount.
- Improve your credit score: Your credit score is an essential factor that lenders consider when assessing your home loan application. A good credit score demonstrates to the lender that you are a responsible borrower and are more likely to make your repayments on time. To improve your credit score, you can pay your bills on time, reduce your credit card balances, and avoid making multiple credit applications.
- Consider additional income sources: If you have additional income sources, such as rental income or income from investments, you can use this to demonstrate to the lender that you have a higher income and are more likely to make your repayments on time. By increasing your income, you can also increase your borrowing power, as the lender will take into account your income when assessing your ability to make repayments.
- Choose a lender with favourable policies for expats: When choosing a lender, it’s essential to consider their policies and criteria for expats. Some lenders may have more favourable policies for expats, such as lower deposit requirements or more flexible income verification processes. By choosing a lender with favourable policies for expats, you can increase your chances of being approved for a home loan and increase your borrowing power.
Rules for Loan Guarantors in Australia
Buying a property is one of the most significant investments most people make in their lifetime. However, for some, obtaining a home loan can be a challenge due to a lack of sufficient income or savings.
In Australia, a loan guarantor can help borrowers overcome these challenges and increase their chances of securing a home loan. A guarantor is someone who provides additional security for a home loan by offering their assets, such as their property or income, to the lender.
However, before agreeing to act as a guarantor, it’s essential to understand the rules and responsibilities that come with it.
Eligibility Criteria
To be eligible as a guarantor, a person must:
- Be a close family member: To be eligible as a guarantor, the person must be a close family member of the borrower. This typically includes parents, siblings, and grandparents. Lenders prefer guarantors who are immediate family members, as they are more likely to have a strong emotional attachment to the borrower and be willing to provide financial support.
- Own property in Australia: The guarantor must own a property in Australia to be eligible. This property will be used as security for the loan, and the lender will take into account the value of the property and the amount of equity the guarantor has in the property.
- Have sufficient equity in their property: The guarantor must have sufficient equity in their property to be eligible. The lender will typically require the guarantor to have at least 20% equity in their property, although this may vary depending on the lender’s policies and criteria.
- Demonstrate financial stability and a good credit history: The guarantor must be able to demonstrate financial stability and a good credit history. This includes providing evidence of income, assets, and liabilities, as well as a credit report that shows a good repayment history and no defaults or bankruptcies.
In addition to these rules, the lender will also assess the borrower’s financial situation to ensure that they are able to make their mortgage repayments. The lender may also require the borrower to have a minimum deposit and may charge a higher interest rate if the loan is considered high risk.
Responsibilities of a Guarantor
A guarantor should be aware of their responsibilities, which include:
- Providing their property as security for the loan: When you agree to act as a guarantor, you are providing your property as security for the loan. This means that if the borrower defaults on their repayments, the lender may seek repayment from you by forcing the sale of your property to cover the outstanding debt. You should be aware that your property may be at risk if the borrower is unable to make their repayments, and you may be forced to sell your property to cover the debt.
- Covering the loan repayments if the borrower defaults: As a guarantor, you are legally obligated to repay the loan if the borrower defaults on their repayments. This means that if the borrower is unable to make their mortgage repayments, you will be required to cover the repayments on their behalf. You should be aware that being a guarantor comes with a significant financial risk, and you should only agree to guarantee a loan if you are confident that the borrower can make their repayments.
- Keeping track of the borrower’s loan performance: As a guarantor, you should keep track of the borrower’s loan performance to ensure that they are making their repayments on time. If the borrower is having difficulty making their repayments, you should encourage them to speak to their lender to discuss their options. It’s important to note that if the borrower defaults on their repayments, this will impact your credit history and may make it more difficult for you to obtain credit in the future.
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Requirements for Going Guarantor in Australia
Types of Guarantees
There are two main types of guarantees in Australia:
- Security guarantee: This is the most common type of guarantor for expats. With a security guarantee, the guarantor provides their property in Australia as security for the loan. This property can be used to secure the loan, which means that the lender can sell the property if the borrower defaults on their repayments. Expats who do not have a property in Australia may not be eligible for this type of guarantee.
- Income guarantee: With an income guarantee, the guarantor agrees to cover the loan repayments if the borrower defaults. This type of guarantee is suitable for expats who do not have a property in Australia but have a reliable source of income. The lender will assess the guarantor’s income and assets to determine whether they are suitable to act as a guarantor.
Documentation Requirements
To apply for a guarantor loan, you’ll need to provide:
- Proof of income (e.g., payslips or tax returns)
- Bank statements
- Guarantor’s property details and equity
- Identification documents for both the borrower and guarantor
How Long Does a Guarantor Stay on a Mortgage?
Releasing a Guarantor
A guarantor can be released from a mortgage when:
- The borrower has built up sufficient equity in the property.
- The borrower can demonstrate an ability to service the loan independently.
- The lender agrees to release the guarantor.
Factors Affecting the Guarantor Release Timeline
When a guarantor agrees to provide security for a home loan, they are typically committed to the loan until the borrower has paid off a certain portion of the loan or until the loan is refinanced. However, there are several factors that can affect the timeline for when a guarantor can be released from their obligation.
Here are three factors that can affect the guarantor release timeline:
- The borrower’s repayment history: The borrower’s repayment history is a critical factor in determining when a guarantor can be released from their obligation. Typically, a guarantor will be released once the borrower has made a certain number of repayments or has paid off a certain portion of the loan. If the borrower has a poor repayment history, it may take longer for the guarantor to be released from their obligation.
- Property market conditions: Property market conditions can also affect the guarantor release timeline. If the property market is experiencing a downturn, it may take longer for the borrower to build up equity in the property. This can delay the guarantor’s release timeline, as the guarantor’s obligation is tied to the amount of equity in the property.
- Lender’s policies and criteria: Each lender has different policies and criteria for releasing guarantors from their obligation. Some lenders may require the borrower to have a certain amount of equity in the property before releasing the guarantor, while others may have a set timeline for guarantor release. It’s important to carefully review the lender’s policies and criteria to determine when the guarantor can be released from their obligation.
Going Guarantor: A Powerful Tool to Help Expats Achieve Their Home Ownership Dreams
Going guarantor can be a valuable option for Australian expats looking to buy property back home. It’s essential to weigh the pros and cons, understand the rules and requirements, and carefully consider the impact on both the borrower and the guarantor. With the right approach and a clear understanding of the process, you can unlock the door to your dream home as an Australian expat.
Have more questions? Speak with one of our experienced expat brokers to find out if you are eligible to apply for a guarantor home loan as an Australian expat or foreign resident.
Get a free Australian mortgage assessment today.
Frequently Asked Questions
Yes, a guarantor can help you secure a loan even with bad credit, but it depends on the lender’s policies and the guarantor’s financial stability.
It may be possible to remove a guarantor if their financial situation changes, but this typically requires the borrower to refinance their loan or provide alternative security to the lender.
Yes, you can change guarantors during the mortgage term, but it usually involves refinancing your loan and may incur additional costs.
If the borrower defaults on the loan, the guarantor is responsible for covering the loan repayments. If the guarantor cannot meet these obligations, their property may be at risk of being sold to recover the debt.
Yes, you can apply for a guarantor loan as a self-employed expat, but you may need to provide additional documentation, such as business financial statements and tax returns, to demonstrate your income and financial stability.
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