Guarantor home loans are incredibly popular these days but what do you do when you want to
remove the guarantor? Today, we're going to take you through
how to actually do that, what it looks like and the steps you need to go through
to cut ties with your guarantor.
So Nathan, first up, how long does the guarantor actually stay on the mortgage?
Usually, we find the guarantee stays anywhere from two to about five years,
depending on a couple of things. The first one is how quickly you pay down the loan.
The second is how quickly your property increases in value.
So when we get to that point where it makes sense, usually when we're lending
no more than 80% of the property value,
we look to remove that guarantor and free your folks, or your parents
or your grandparents or whoever it was that was on the property, to assist you with
the guarantee away from it.
Hm, okay, so typically though, by default, they won't get removed automatically?
So you need to actually go through that process. So Nathan, what are the steps of removing
the guarantee if you've got a 90% loan or you've even got, say 10% equity in your home.
If there's less than 20% equity, you will have to pay what we call 'lenders mortgage insurance.'
It's a one-off premium. It is charged by the lender to protect the lender
and is compulsory. There are some circumstances where you can
have it removed. However, if you are lending over 80%,
you would pay lenders mortgage insurance. Once off, add it to the loan, covers you for
life of the loan and in some circumstances, you may have to remove it and pay that,
which is the cost of removing a guarantee but if it has to happen, it has to happen.
Yeah, so you could be in a situation where your parents might have sold their home
and they want that money back. Or there could be other situations
that you might have to go through. So potentially, doing that refinance
like Nathan said, where you put about 10% equity or say, you've got a million dollar property
which is I'm just using it because easy numbers, and you own $900,000 on it, it's one way
you can put, maybe in your parents’ house or the guarantors house so you're free and easy.
But generally, if you're doing it that 90%, you might need look an internal refinance
with that bank. Nathan, what happens if you want to remove
the guarantee at an 80% LVR? Or if you have 20% equity in your own home?
So remember, every time you look to remove the guarantee, you are doing an application
with the lender, so they're going to assess you based on your income as of application day.
They'll look at the property value as of application day.
So they'll do the assessments, they'll look at everything as of today.
So you start in Day 1 basically? - You are starting again.
You need to do a brand new application
and also, you'd be quoted fresh fees and charges, everything that's associated with
a brand new mortgage. You'd start again. The good thing is you've removed
the guarantees off, so it gives them a breath of fresh air that can move on
and you can move forward with your property on your own.
Well, I guess the three things that are good about removing the guarantee when
you've got a 20% deposit are Number 1, you avoid lenders mortgage insurance.
Because you've got the 20% equity in there, hooray, you missed that,
which could be thousands of dollars. Number 2 is because you've got more equity
in the loan and you got, you know, a hard deposit on that 80% loan,
the interest rate could be lower than if you're removing it at 90%.
And number 3 is that it can actually simplifies the process.
So usually, if you have less than a 20% deposit or less than 20% equity, the bank is going to
ask you a lot more questions because you're actually seen as higher risk to them compared to
someone who had a 20% deposit. So doing that way can be a great way to
really fast track that, get you better rates and actually, get you separated from the parents'
or the guarantees' loan, so you can stand on your own two feet again.
So Nathan, a couple of curveball questions because why not? Can my guarantor sell their home?
They can. Now, keep in mind that there is a second mortgage registered on their property,
so when they sell their home, that second mortgage either needs to be paid out by the guarantor
or you'll need to refinance your property so that you can add that second mortgage back
onto your property. One quick thing there is you do need equity
in your property, so if you just set up the guarantor and they're selling their property,
you might not have enough equity in your exact property that
you're looking to refinance it on.
Another quick question in removing the guarantee from a guarantor home loan is can I sell my house?
Absolutely. You can indeed. Once again, remembering if you have lent 100% of
the purchase price and you under sell your property, you're going to have a residual
leftover and that will be left on the guarantee's property.
So you just want to make sure if you are selling, you cover the full debt.
So I guess Nathan, let's round it off. The guarantor stays on your mortgage by default
forever while you got that loan, until you want to remove it.
You can remove it if you've got a little bit of equity.
The easiest way is obviously paying it down quicker.
Any other tips that you have in this sort of structure?
Yeah, as you said before, you have to refinance your loan to remove the guarantee.
So it will not be removed automatically. Generally, the best rule of thumb after two
to about five years, your loan will have gone down, your property should have increased in value
-- fingers cross -- and that's a good time to revisit it and try and remove the guarantee.
If you want more information on guarantor home loans or removing a guarantor,
check out our website at HunterGalloway.com.au.