Guarantor Home Loan - Can my family help?
A guarantor allows you to purchase a property sooner and potentially save thousands of dollars
By using the equity they've built up in an existing property, a guarantor can help you to buy a home or invest in residential property - and the best part is, they don't need to actually provide you with any cash.
One of the most popular reasons that purchasers use guarantors is to avoid paying Lenders Mortgage Insurance (LMI). This is a form of insurance that protects lenders from borrowers defaulting on loan repayments and is payable if you only have a small deposit. Your guarantor helps you avoid this charge by providing a guarantee for your home loan which is secured on their property.
Who can use a guarantor?
The most common need for a guarantor is if you are a first home buyer who has a steady income and can service a home loan without assistance, but you haven’t been able to save up the necessary deposit.
If you don’t have at least a 20% deposit, you will have to pay Lenders Mortgage Insurance (LMI), which can be as much as $10,000, so having someone go guarantor for your loan means you can borrow up to 105% of a property’s value and not have to pay LMI.
It also means you can get a foothold in the property market sooner rather than later, because if you had to continue saving for a deposit while housing prices continued to rise, you might never have enough deposit to secure your home loan.
You may still be required to have at least 5% in genuine savings (held in an account for at least 3 months) to demonstrate your ability to save, but apart from that, your deposit can be whatever you have managed to save to date.
Who can be a guarantor?
Guarantors are typically parents wanting to help their kids get a foothold in the property market. As well as a parent, a guarantor can also be a parent-in-law or a step parent and grandparents, siblings, spouses and de facto partners will also be considered by many lenders.
And while lenders have different eligibility criteria, the following usually apply to all potential guarantors:
- Age – they must be over 18 and usually under 65.
- Residency – they must be an Australian citizen or permanent resident.
- Finances – they must have suitable equity in their property and a stable income.
- Credit – they must have a good personal credit rating.
What types of guarantees are there?
There are several different types of guarantees that a guarantor can be a party to including;
- Security guarantee - the guarantor uses equity they have built up in their property as security for your loan (known as an equity guarantor).
- Security and income guarantee - the lender uses the guarantor’s property as security and relies on their income as additional assurance.
- Family/parent guarantee - the guarantor is directly related to the borrower (known as a parental guarantee).
- Limited guarantee - only part of the loan is guaranteed by the guarantor, reducing their potential liability to a predetermined amount.
What are the benefits of using a guarantor?
With market conditions becoming more difficult for first home buyers, more young couples are turning to their families to help them qualify for their first mortgage. And there are a lot of advantages in doing so.
Having a guarantor means you don’t need to save as big a deposit and because you can borrow more, you may be able to buy a larger property than you originally planned. As previously mentioned, you can also avoid having to pay Lenders Mortgage Insurance (LMI), which can add a sizeable chunk to the cost of securing a home loan.
A further advantage is that some lenders will allow you to consolidate some minor debts into your new mortgage such as personal loans and credit cards, as long as they make up no more than 5 - 10% of the purchase price.
And finally, a security guarantee is flexible enough that a guarantor can choose a limited amount of liability and can be released from the loan at a mutually agreed time, so the borrower doesn’t have to feel obliged to their guarantor for any longer than necessary.
What are the drawbacks of using a guarantor?
The main drawback of using a guarantor is that you are putting their property at risk. While in most cases that risk is minimal, given that you should be well equipped to pay off the loan and only need some help with the deposit, the risk is there nonetheless. You could get sick or lose your job tomorrow and the lender would then turn to your guarantor for their loan repayments.
It is for this reason that anyone considering going guarantor for someone should seek legal advice before doing so. It is a major financial decision and should not be entered into lightly and a solicitor can explain your legal rights and obligations and advise on the most prudent way forward.
When can I remove the guarantee?
Ideally, the guaranteed amount should not be the entire amount of the loan, but only the portion needed to secure it, and the guarantee should not be in place for any longer than absolutely necessary.
The borrower and guarantor should apply to the lender to remove the guarantee when the loan amount has been reduced to 80% or less of the property value. This should be achievable in two to five years, particularly if the property has increased in value during that period.
Why should I speak with a mortgage broker?
A mortgage broker will be able to give you the proper guidance on how guarantor loans work. If you're considering a guarantor loan, a mortgage broker can let you know which lenders are willing to work with guarantors and will be able to negotiate between several lenders to help you find the most competitive product.
With access to more lenders and more products than anyone else, see us first at Loan Market, helping people into homes for more than two decades.