Buying a house can take time, especially while having to save enough money for a sizeable deposit and all the other costs involved.
Lenders view customers with a deposit of 20% as a less risky client. Having less than a 20% deposit means you’ll have to pay for Lenders Mortgage Insurance (LMI), this is a once of risk payment in the event that you are not able to meet your debt obligations.
If you don’t want to pay those additional fees, but also don’t want to wait until you’ve saved a 20% deposit of the purchase price to enter the property market, a guarantor home loan may be a feasible option.
This article will explore everything you need to know about guarantor home loan requirements in Australia.
What Is a Guarantor Loan?
A guarantor home loan is when a close family member, such as a parent, uses the equity they’ve built up over the years in their own property as security for your new home loan.
This way, you can take out a home loan without paying the standard 20% deposit requirement, plus you don’t have to pay LMI. You simply borrow money from your chosen lender and repay it as you would normally, with your guarantor providing the security that a deposit usually would.
With a guarantor loan, if the borrower defaults on their loan repayments, the guarantor is then responsible for covering those expenses—or else the lender is allowed to seize the guarantor’s home to recoup the loss.
You can choose to guarantee the entire home loan or only a portion of it, such as the 20% deposit. Once you’ve repaid the guaranteed portion and/or the loan is 80% of the value of the property, the guarantor is released from the loan.
Why People Take Out a Guarantor Loan
Besides not wanting to wait until they’ve saved up enough money for a deposit, other reasons why people take out a guarantor loan include:
- They don’t have a good credit score.
- A guarantor will ensure a lower interest rate.
- They want to avoid LMI costs.
Example: How a Guarantor Home Loan Works to Help You Not Pay Lenders Mortgage Insurance
Charles was keen on a home with a property value of $500,000. He had saved up a deposit thanks to work bonuses of $50,000—exactly 10% of the property’s value. He needed a deposit of at least $100,000 (20%) or he would be required to pay LMI.
Charles approached his father to guarantee his home loan, and his father agreed to put down $50,000 of his own home equity as security. This way, Charles had the full 20% security required to avoid paying LMI.
Even though Charles only had a 10% deposit, thanks to his father’s help, his loan was approved and he didn’t have to wait until he had saved up an additional $50,000 to make up 20% of the total loan amount.
Who Can Be a Guarantor?
The primary factor to having a guarantor home loan approved is that the borrower has a strong relationship with the guarantor. This typically means the person should be an immediate relation to offer a family security guarantee.
When choosing a guarantor, you must trust the person—and they trust you in return.
Lenders have strict requirements for guarantors. They must:
- Have sufficient usable equity on their property.
- Have proof of a stable income – depending on which lender. .
- Have a good credit history and rating.
- Be a permanent resident or an Australian citizen.
- Be between the ages of 18 and 65 years.
- Own the property in Australia.
The typical people allowed by lenders to be guarantors include:
- Co-borrower’s parents
- Adult children
- De facto partners
Some family members are acceptable as exceptions:
- Legal guardians
Most lenders don’t accept the elderly and retirees to be guarantors, however there are a few lenders on the market that would have an appetite to lend on a case by case basis.
A self-funded retiree using their own home is acceptable to some lenders. If they’re using their investment property as security, it’s even better, and most lenders are acceptive in taking an investment property rather then an owner occupied property.
The best bet is that if they’re still working, they’re acceptable to all lenders offering guarantor loans.
Guarantor home loans can help borrowers buy property sooner than if they had to wait and save up enough money for the required house deposit. Plus, having the security on your loan can save you money by alleviating the LMI costs.
But guarantor home loans have quite strict requirements to be approved. A guarantor must be the borrower’s parent, adult child, or spouse between the ages of 18 and 65 years.
They must also have proof of a stable income and a good credit history and rating, and at least 80% equity in their property or have paid it off fully.
Our mortgage brokers from The Mortgage Agency are home loan specialists that can provide personal financial advice on these options to help you determine whether a guarantor mortgage is a good idea for your financial situation.
Our team will assist you in identifying who is the best person to ask to be your guarantor, work through the entire loan application process, and ensure that both parties understand their responsibilities.
If you’re interested in a guarantor loan, contact us today and our mortgage brokers will help you fast-track your goals in the property market.
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.