Sage Advice

Understanding the Guarantee

by Anthony Sage

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Many of our clients ask us if having a family member guarantee their lending would help their chances of an approval and getting into their first home. Guarantee’s certainly have their place in the lending world - but have become less common for a number of reasons.

Historically the banks offered ‘limited guarantees’ meaning that guarantee is only against a particular portion of the loan or specified dollar amount. They have now in most instances, moved away from this practice to their preferred ‘unlimited guarantee’ structure which can become problematic and be daunting for guarantors to commit to. 

There are exceptions and some banks will allow a limited guarantee in specific situations structured like the example below:

First home buyer takes a home loan up to 80% of the property value, let’s say an $800k loan on a $1m home purchase. This is typically a standard home loan with term up to 30 years. Sometimes this can be put on interest only to allow focus on repaying the loan outlined below in part 3.

10% deposit coming from the first home buyers e.g. $100k made up from say KiwiSaver + savings. Note that most banks like to see 5% genuine savings as a minimum borrow contribution.

10% loan guaranteed by parents/family, e.g. $100k (unrelated parties are problematic) which generally needs to be on a shorter loan term (5-10 years) with the aim of aggressively repaying this loan and giving the buyers the ability to remove the guarantee to leave them with the standard home loan only.

Another issue with guarantees, particularly the unlimited variety is that the guarantor must prove that they can service their own liabilities against their income AND the liabilities of the borrowers they guarantee. As test rates have skyrocketed in the past year, this can be a challenging feat for most people. 

Guarantees also allow the bank to cross securities, which can make changes to loans/sale of property more complex, requiring new applications to change the status quo (and on sale of one home/asset the bank can require ‘full sale proceeds’).

Of course, everyone’s situation is different, and each bank does things slightly differently. Ask your Advice Knight adviser if a guarantor is an option – to figure out the best structure given your unique situation.