How does a guarantor loan work?
One of the biggest barriers to buying a home is coming up with the deposit needed to cover the lenders requirements and also the associated fees (such as stamp duty & lenders mortgage insurance).
A guarantor loan can reduce and even remove the need for any deposit at all. This is done by taking security over another property. Typically a family member will be the one to provide their home as security and they must have the required equity available in their property to do so. This amount will be different based on the loan amount and purchase price of your new home.
As an example, say you wish to buy a home for $300,000 and you currently have no deposit we can look to borrow a total of $316,000 to cover the purchase cost and associated fees. The loan is then basically split into two separate parts, one for $240,000 and the other for $76,000. The $240,000 loan is secured solely against your new home, while the $76,000 loan is secured against your new home and the guarantor’s property. The borrowers are the ones responsible for the repayments of both loans at all times.
As the structure of the guarantor loans dictate that we must keep the loan equal to or less than 80% of the value of each property we do not need to pay any lenders mortgage insurance (as this is usually payable when we borrow over 80% of the value of any property).
Not all lenders will consider doing guarantor loans and each lender that does will have different rules and restrictions around the structure and process.