Guarantor loans are designed to help those who can only afford a small deposit – or even no deposit at all.
A guarantor can be a close family member who uses some of their own home’s equity to secure your home loan.
The benefits are that it will could allow you to purchase something more expensive due to the equity that can be used and you can avoid having to pay extra costs such as lenders’ mortgage insurance (LMI).
While this certainly makes guarantor home loans seem appealing, there’s a lot to consider before going ahead. The guarantor could be at risk of losing their house if the borrower defaults on their mortgage repayments, and it can be many years before the guarantee can be removed.
Here’s everything you need to know about how a guarantor home loan works.
What Happens When a Family Member Becomes a Guarantor for My Home Loan?
- In order to become a guarantor, the person you choose must have sufficient equity in their own home to be able to cover 20% of your new property value. Their property assists you in paying your deposit.
- The equity is used as the primary security for your home loan. The lender could also take a loan out over the guarantor’s property, which will stay in place until the guarantee is removed or expires.
- The guarantee is a legally binding contract. If you fail to honour your monthly repayments on your home loan, it could require the guarantor to take over.
- As soon as the value of the the loan equates to 80% of the value of the property , the guarantor can be removed from the home loan. They can also be removed if the property value has increased so that it meets the bank’s lending policies.
How Much Can I Borrow?
Although a guarantor can be a financial help to your home buying journey, having a guarantor for your home loan doesn’t mean your borrowing power will improve. The guarantor isn’t a co-applicant for your loan, their property is simply used as security.
If you are interested in buying a property for the value of $400,000 but only have $20,000 saved up towards a deposit, your loan has a high loan to value ratio of 95%.
Borrowers that have a 20% deposit have an 80% loan to value ratio. Lenders prefer the 80/20 sweet spot, because they consider a 20% deposit enough security should you default on your mortgage.
If you have less than a 20% deposit, lenders require borrowers to pay for LMI. However, if you have a family member willing to act as a guarantor for your home loan, you can use the equity in their property to cover the balance of the deposit.
What’s more, you could even borrow up to 100% of the purchase price if you have a guarantor, meaning you pay no deposit on your home loan at all.
How Do I Apply for a Guarantor Home Loan?
It’s not that easy to be approved for a guarantor loan. The lenders that allow these types of loans have specific requirements and strict applications to ensure that both the guarantors and the borrowers are aware of their obligations.
Borrowers who want to apply for a guarantor loan must provide evidence of:
- an excellent credit history,
- a stable job with an income that’s steady and consistent,
- the means and discipline to repay the entire loan amount from their income.
Lenders will also consider the guarantor’s credit report, and the guarantor should have a strong asset and equity position.
When Do Guarantors Get Removed From Home Loans?
How long the guarantors stay attached to your mortgage will depend on how fast you pay off the loan, and how quickly your property increases in value.
The guarantee can be removed by refinancing your home loan.
Most major lenders have similar criteria you need to meet in order to remove the guarantor:
- During the last six months, all payments must have been made on time.
- If you want to avoid having to pay lenders mortgage insurance, your loan to value ratio must be less than 80%.
- Your income, employment, credit history, and other factors relating to your financial situation have to meet the lender’s policy.
It’s best to remove the guarantee when you have paid off more than 20% of the value of the property.
This is beneficial because:
- You can avoid paying thousands of dollars for LMI.
- You could qualify for a lower interest rate.
- The process is less complicated with less paperwork.
It isn’t recommended to remove the guarantee earlier than that unless there’s an important reason to do so.
How The Mortgage Agency Can Help
Taking out a guarantor home loan can help you enter the property market sooner than if you had to take the time to save up a larger house deposit. Plus, the additional security can save you money on LMI.
But, a guaranteed loan does have some important things to consider. Your lender holds the title to the guarantor’s property while they are guarantors to your home loan. If you default on your home loan repayments, your guarantor will also be liable to repay the funds up to the amount they guaranteed.
At The Mortgage Agency, we are home loan specialists. We can help you identify whether a guarantor mortgage is suitable for you and your financial situation. We’ll assist you and your guarantor through the application process and ensure you both understand your responsibilities.
If you’re interested in utilising a guarantor loan to buy your own property sooner, contact us today. Our mortgage brokers can’t wait to help you reach your homeownership goals.
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property buyers and investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal, tax or investment advice. You should, where necessary, seek your own advice for any legal, tax or investment issues raised in your affairs.