Buy your first home with a guarantor


Crazy house prices require crazy deposits. Correction. Crazy house prices require crazy equity upfront. This is how guarantor loans work and why you can buy a house with no deposit.

To explain equity we need to imagine we own a house worth $1,000,000. Now we're imagining our million dollar house imagine the mortgage on our imaginary house is $400,000. Your house minus the debt owing against your house equals equity. It's the amount of money leftover after clearing the debt.

$1,000,000-$400,000=$600,000.

With a bit of luck Mum and Dad own this house and they have $600,000 equity that they can "lend" to you so that you can use it as a deposit. Instead of saving cash for a house Mum and Dad can let you use $150,000 of the equity from their house. No cash changes hands but the bank will hold an extra $150,000 of your parents property as security.

Traditionally you would give the bank your house deposit but because you are using a guarantor instead of giving the bank cash you give them something worth the equivalent, in this case, the right to access part of your parents property (part of the equity) should you stop paying your mortgage. 

To explain this better read the following scenario. You've bought a house for $500,000 and borrowed $500,000. All of a sudden you stop paying your mortgage and the bank sells your house from under you so that they can close the mortgage. If your house sells for $480,000 than the bank loses money. 

In this scenario had guarantors been used the bank would come to the guarantors and say we need you to cover the shortfall. This is the risk to the guarantors. If the kids don't pay the bills and the bank forecloses and then doesn't sell for the amount owing on the mortgage they will ask you to pay the shortfall.

The benefit of using guarantors is you don't need a deposit and you avoid Lenders Mortgage Insurance costs. Guarantors can not assist you to prove you can afford a loan, you still need to earn enough to satisfy the banks lending criteria.

This is really hard to explain in a blog and I hope this has helped. If I can explain this better at all please don't hesitate to contact me, I'd be more than happy to explain this over the phone or even arrange an appointment and we can sit down and go over everything in more detail.