October Newsletter
Guarantors need mortgage exit plan
Posted on Thursday, October 01 2009 at 9:00 AM
Young Australians who buy property by using a family guarantee need to have an exit strategy in place so their parents won’t have the kids’ loans hanging around their financial necks forever, according to Smartline Personal Mortgage Advisers.
Family guarantees are becoming increasingly popular in the face of tightening lending criteria, says Smartline managing director Chris Acret.
“However, the most important step in putting a family guarantee in place is to ensure there’s an exit plan – a plan designed to release the guarantors – generally parents – from the loan to fund their child’s home as soon as possible,” Acret says.
“This is a relief for the guarantor, who doesn’t want the burden of a 30-year loan of their property limiting their options, including the ability to sell their house.”
Exiting a family guarantee usually involves having the borrower’s house revalued down the track to assess how much equity the owner has in the property, which can be used to release the guarantors.
Acret says that while family guarantees are most popular with first homebuyers, they can also be useful for some property investors.
“In particular, if a client was looking at having to pay lenders mortgage insurance (LMI), we would at least raise the idea with them because they could potentially save thousands of dollars,” he says.
“LMI can be a little confusing and the amount you pay will differ depending on the amount you borrow. Suffice to say, where people are borrowing up to 80 per cent of the… value of the property, they don’t need to pay an LMI premium. However, once the LVR (loan-to-value ratio) is more than 80 per cent, the LMI premium kicks in.
“We generally aim to limit the amount the guarantor has to guarantee, to make it more palatable for them. We’re generally not looking for the parents to fund the total amount of the child’s debt – generally just the lower amount required to bring the loan under the 80 per cent LVR.”
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Guarantors need mortgage exit plan
