in your best interests
Using a guarantor can be a great solution if you are struggling to meet a lenders deposit requirements - but it can be a bit complex too. Brian, principle adviser at Auckland Mortgage Brokers, looks into the details for you.
As you can probably guess, each bank has a slightly different take on it, so your first point of action should be to contact us initially and let us know your plans. You can contact us here.
So how does a guarantee work?
Well, for those who can't quite manage say a 20% deposit banks may be willing to lend money if there is a little outside assistance (i.e. the guarantor). What normally happens is the bank (or lender) will secure a mortgage over your guarantors property in addition to the property you are purchasing.
The guarantee is normally limited to 20% (plus interest and charges in the event of default).
The banks put this extra security in place to mitigate any extra risks they perceive in lending to you. Banks aren't in the business of selling properties at mortgagee sales - but if something goes wrong they want to make sure they are well and truly covered!
It is normal for banks to require that you (the purchaser) can service the entire debt, but some may require that the guarantor prove they can service a portion of it too (20%). They may also require the guarantor to become a co-borrower of part of the debt.
Having a guarantor in place is fine for a while, but ideally you would want to have the guarantee released as soon as possible. For that reason it makes sense to have this set up for a relatively short period (say 2-5 years), after which you can refinance and have the guarantee released. During this period you (the purchaser) would reduce the debt sufficiently so the guarantee is no longer required, allowing the guarantee to be released.
Usually the purchaser(s) needs to prove they can service the entire debt. Some banks require the guarantor to prove they could service some of the loan (20%) and/or be a co-borrower of some of the debt.
For this reason the lender will require some financial information from the guarantor to prove they can actually cover the debt should you default. This may be a full application for some banks. Before a guarantor agrees to anything they should seek independent legal advice.
Security from a guarantor doesn't always need to be over a property. If, for example, your parents are happy to act as guarantors and have a large enough term deposit, this could be used instead. This can be a welcome relief for some guarantors as the thought of using their own home as security can be a little daunting...
Before you venture down this path it makes sense to contact us first to discuss. Use our 2min application form and we'll get back to you asap. If you haven't quite managed to save the deposit you'd hoped for yet then check out our info about the Welcome Home Loan and the Homestart Grant as these may ideal for you too.