PROPERTY SHARE & GUARANTORS

With housing affordability a real issue in today's environment, lenders are always looking for new ways to lend money.

There are two main alternatives for prospective borrowers to own a property.

1. Property share
2. Guarantors

Property share is an easy to manage home loan option which allows friends to purchase a property together but keep their finances seperate. It helps first time buyers and investors get into the property market sooner.

Each borrower guarantees each other and therefore independent legal advice is mandatory.

Each borrower has the flexibility to structure their own loan facility as desired - each loan facility can be for different amounts, with different loan types, duration and payment structures that best suit the individuals' requirements. For example, you will have the ability to manage your own special repayments and redraws and to have seperate offset accounts, transaction accounts, credit cards and lines of credit.

Lenders mortgage insurance, if required, is split proportionately to each loan account.

The added advantage is that each borrower only has to prove servicing ability on their own loan amount, therefore allowing a higher purchase priced property as an option.

There are a number of important considerations that you should think about before applying for a loan under property share and we'd be more than happy to email you this.

GUARANTORS

The guarantor option will help you secure a home loan in case you are unable to provide your own adequate deposit. By adequate deposit, we mean 5% of the contract price in genuine savings is required.

Benefits of utilising a guarantor

• Enjoy a sense of independence and financial security, having purchased your own property
• Purchase the property you want rather than having to settle for a cheaper alternative
• Still be entitled to standard interest rates and the normal suite of home loan products
• Avoid Lender's Mortgage Insurance (LMI) because your parents will put up a limited guarntee amount enough to bring your 'loan to value ratio' (LVR) down to 80%
• Leverage off the equity in your parent's home to assist with your first purchase
• Your parent's won't need to hand over cash to you nor will they need to make repayments on their limited guarantee amount while they're acting as guarantor
• At any time after settlement, your parents can discharge their responsibility as a guarantor but if your LVR is above 80% at the date of discharge then you will have to pay the required mortgage insurance premium.

Example of a guarantor providing security support only:

Miss A is seeking to borrow $315,000 to purchase a property valued at $300,000 (as she has little deposit, so needs a loan to cover the purchase ptice, stamp duty, and other expenses etc). The LVR for this example is 105%, which is outside of acceptable security limits for any Bank. In order to help Miss A obtain her loan, Miss A's parents have agreed to allow the Bank to take a mortgage over their property in order to provide a limited guarantee. The limited guarantee provided is for $93,750 as this will bring the LVR down to 80% (i.e. loan / total security offered, or $315,000 / $300,000 $93,750 = 80% LVR).

Bear in mind though, a limited guarantee only reduces the LVR, so as to avoid LMI, and does not reduce the loan amount requested from Miss A. Miss A's repayments will still be based on a $315,000 loan amount. Secondly, as long as your parents combined limited guarantee amount and their existing mortgage amount is < 80% on their own property's value then this still becomes a viable option.

What a guarantor needs to know:

With guarantees, if down the track you default on your home loan, the Bank can then demand repayments be made from your parents until you get back up on your feet again.

We always look into the ability for parents wanting to act as guarantor, that they are able to discharge their responsibility within a couple of years after initial settlement of your loan.

If your parents do not feel comfortable in being a guarantor than they can take out a second registered mortgage on their property instead and gift you those funds but they will then be responsible for making repayments on their second registered mortgage from day 1.

Banks will require your parents to seek independent legal advice before they sign any part of the mortgage contract.