You’d have to be pretty oblivious to have successfully ignored the conversation over the past few years around the difficulty first time buyers face getting a foothold in the real-estate market.
Regardless of who or what’s to blame (and it’s definitely not avocado toast), the fact remains that with house prices soaring across Australia, and now with interest rates on the rise, buying your first home has rarely been tougher.
But there may be a way for those fortunate enough among us to buy a house with little or no deposit, and it has to do with your parents, or a special someone in your life. It’s called a guarantor home loan. As take-up of this home loan type grows, let’s explore what they are, how they work, and whether it may be right for you.
What is a guarantor home loan?
At the best of times, getting your first home is no easy feat. Saving for a deposit can be difficult, and can take years.
A guarantor home loan provides would-be buyers with a way to get into the market sooner, often with much smaller deposits, or in some cases, no deposit at all.
Guarantor loans can make this happen if you’re able to rely on a parent or family member to use the equity in their property as additional security for your loan. So, if your deposit is lower than the often-mentioned holy grail amount of 20% of your purchase price, you can use your guarantor’s equity to raise your deposit amount.
Not only that, a guarantor home loan is often a way for first-time buyers to avoid paying dreaded lenders’ mortgage insurance – a saving of thousands of dollars.
How is a guarantor loan different from other loans?
First, lets understand how guarantor loans are usually structured. A guarantor loan can sometimes be its own specific loan product, or sometimes it can simply be a way to structure an existing loan product.
The main ways guarantor loans are different from other home loan types are:
With most home loans, it can be said that the higher the deposit amount you’re able to save, the better. This is because having a higher deposit will reduce the principal you have to repay, and if you reach the 20% deposit threshold, you’ll be able to save money by avoiding paying lenders mortgage insurance.
With a guarantor home loan, your deposit amount can be as much as you’re able to save, and then it can be topped up with an amount of equity in your guarantor’s property. So, you might only have a 5% deposit saved, but can top this up to 20% by using your guarantor’s equity.
LMI, or lenders mortgage insurance is common across all lenders. It may be an unwanted but necessary cost first home buyers have to absorb to secure their first place. Typically, if your deposit amount is under 20% of your purchase price, you’ll have to pay LMI as part of your overall loan repayments. We’ve written on LMI before – what it does, and how it works. Suffice it to say, a guarantor loan provides a way for you to boost your deposit amount, lowering your loan-to-value ratio and avoiding paying LMI.
One other difference with guarantor loans is that typically, as you begin to make repayments, you are paying out your guarantor. In other words, instead of just paying down the loan principal you owe your lender, you also repay the amount your guarantor lent you in equity. Once this is paid out, you take full ownership of the remaining loan balance owed to your lender.
How does a guarantor loan work?
Okay, so let’s use an example to see how a guarantor loan works.
In most cases, the deposit amount required to avoid paying LMI will be 20% of the purchase price, or $100,000. Yikes.
Without this additional 50 grand, you’re going to be up for LMI, right? Not if you take the option of a guarantor loan.
If you’re lucky enough to have a guarantor that is willing to provide $50,000 in the form of equity in their home as security for your loan, you can reach the 20% deposit amount and avoid LMI.
It’s important to remember – your guarantor will not be required to make any repayments on your loan – this responsibility lies with you.
However, if for some reason you’re unable to maintain your repayments, the lender will look to your guarantor to make your repayments.
What are the benefits of a Guarantor Loan?
Guarantor loans can help you break into the market sooner
If saving for your deposit is proving difficult, one of the major advantages of a guarantor loan is it can help first time buyers gain a foothold on the property ladder sooner than they’d otherwise be able.
Saving can be tough – especially for such a large purchase. Even with all the motivation in the world, with rising property prices, wage stagnation, cost of living increases and interest rate movements can make it seem like you’re playing with a stacked deck.
Having someone who’s willing to act as your guarantor can help you potentially cut years off your path to purchasing your first home. If you value time above all else, a guarantor loan may be right for you.
Removing your guarantor from the loan
Anyone who may be wary of exposing their parent or guarantor to financial risk can surely see the benefit of removing this liability as quickly as possible, and this is the way most guarantor loans are structured.
You may be asked to pay some additional fees in order to release your guarantor, depending on your lender. This can involve a fee paid to the lender to cover the revaluing of the primary security property, as well as lender discharge fees.
Save money by avoiding LMI
We’ve said it already, but it bears repeating. Another of the major benefits of a guarantor home loan is that they give buyers the ability to bypass having to pay lenders mortgage insurance.
By boosting your deposit amount above the 20% threshold most lenders require you to meet to avoid LMI, you can count literally thousands of dollars in savings.
As a new home buyer, who’s been scrimping and saving a deposit for a while, this is nothing to turn your nose up at.
What do I need for a guarantor home loan?
- The first thing you’ll need for a guarantor home loan is a family member who is willing to act as guarantor on your behalf.
- Secondly, your potential guarantor will also need to be a home owner with sufficient equity in their property to grant you access to. This is because your guarantor’s equity will form part of the security for your loan. For those wondering what we mean by equity, we’ve written on this before, but it’s basically the value of your guarantor’s property and the remaining balance on their home loan.
Make no mistake – asking someone to act as your guarantor and them accepting is a big decision for both parties. It means that if, for whatever reason, you can’t continue to make repayments, the guarantor will need to meet their requirements under the guarantee.
Anyone considering a guarantor loan may be wise to seek independent legal and financial advice before committing. In fact, most lenders will insist on this.
How will having a guarantor help my home loan application?
If your deposit amount is lower than you might like, but your income level has you confident you’d be able to make the required home loan repayments for your first place, a guarantor can increase the likelihood of your home loan being approved by helping you secure additional funds to buy a home.
Saving for a deposit is one of the biggest financial goals in most of our lives, and it’s no mean feat, especially if you’re trying to save while also paying rent.
By having a guarantor, not only will you be able to secure additional funds for your deposit amount, you may even be able to use some of your guarantor’s equity to pay some of the additional costs involved in buying a property.
Will becoming a guarantor affect my future borrowing capacity?
In a way, yes. If you’re able to find a responsible lender who will ensure that the funds your guarantor provides via equity are within their lending serviceability guidelines, your future borrowing capacity shouldn’t be significantly negatively impacted.
With any future loans you apply for, as long as you continue to act as guarantor, this will be taken into account when assessing you for loan suitability.
Can I change my guarantor loan after funding?
Yes, if you wanted to convert the loan from a variable rate to fixed rate. You won’t be able to convert principal and interest repayments to interest only repayments.
What’s more, no additional loans can be taken out while your guarantor remains on your loan.
What purposes are excluded with a guarantor loan?
Applying For A Guarantor Loan
Save as much deposit as you can
Goes without saying, but the higher your deposit amount can be, the lower the overall principal you’ll have to repay, and lower the level of financial exposure for your guarantor will be.
Find a house that’s the right fit, or at least have a price range.
By doing this, it may seem like you’re jumping the gun a little bit, but you’re actually doing yourself a favour. By having a price range or purchase price in mind, you can weigh up your current deposit amount against it. Having these figures may make the conversation with both guarantor and lender easier as you’ll know roughly how much equity you’ll need to access.
Source your guarantor
It’s time for a frank and open conversation with the family member you’re thinking might be able to act as guarantor.
Tell them about your situation, provide them with evidence you’ve tried your best with deposit saving. Ask them about their financial position, and if they’d be willing to act as guarantor. Explaining all the benefits and risks involved is important, and discuss whether you both should obtain independent financial and legal advice. Be thoughtful and honest, and be prepared for both answers – Yes and No.
Start a conversation with an expert lender
It’s important that you do your research and find a lender who offers guarantor home loan conditions that will suit your needs.
At Greater Bank, our guarantor home loan option is called a Family Pledge Loan, and we’ve helped first home buyers to get into the market with a little help since 1945.
Getting started is easy – request a call-back from a lender near you by making a home loan enquiry online, by calling 13 13 86, or by visiting your local branch. Our mobile lenders are even able to come to you.