The Mortgage Agency
Are you looking to enter the property market and become a homeowner? If your financial circumstances aren’t ideal, there are ways you can better your likelihood of having a home loan approved, such as having someone act as a guarantor.
How a Guarantor Home Loan Works
When you apply for a home loan, lenders base your eligibility on your credit score and history, income, debts, age, deposit, and how much you want to borrow.
This is to determine your affordability and whether you can service your loan.
If you cannot meet one or more of the criteria, such as the deposit requirements, you may be able to apply for a guarantor loan.
A guarantor loan is backed by a close family member willing to offer their property as security and take on the financial responsibility if you fail to repay them. This family guarantee gives lenders more peace of mind because they can access additional security on your loan if necessary.
The guarantor has to prove to your lender that they have sufficient equity within their property to be used as a security guarantor.
So, they don’t give any cash upfront – money doesn’t change hands in a guarantee. Instead, the guarantor offers up a portion of their home equity to make up the balance of your house deposit.
Lenders generally vary in their rules and requirements surrounding guarantor home loans. When you enlist the support of our mortgage brokers, we’ll liaise with your lender of choice and explain the ins and outs before you go ahead and ask someone to guarantee your loan.
It’s important to note that there are risks involved in this arrangement. You and your guarantor both need to consider them at length. For example, your guarantor must understand they are taking on a significant financial burden if you default on your repayments.
Are you considering a guarantor home loan but want more information? Contact The Mortgage Agency, and we’ll schedule an appointment to discuss the process. As we are home loan specialists, our mortgage brokers can help you assess the right option for your needs and financial situation.
A Guarantor Means You Don’t Pay Lenders Mortgage Insurance
A guarantor home loan can come in handy if you don’t have enough money to cover the deposit but have the income to cover the required loan repayments. The guarantor helps you secure the additional funds needed to buy a home.
Some lenders allow you to borrow the entire purchase price plus stamp duty. Lenders have different requirements and benefits. Our team has relationships with major lenders, so that we can advise you on their differences. For example, some lenders will only allow a guarantee of 20% of the loan is 100% of the purchase price.
A very appealing benefit of having your home loan secured by a guarantor is that you can save thousands of dollars by not paying lenders’ mortgage insurance (LMI).
Lenders usually require borrowers to take out insurance if they haven’t paid at least a 20% deposit. This insurance protects the lender should you default on your loan: less than a 20% deposit usually isn’t enough to satisfy the damages.
Lenders consider a guarantor enough security on the loan to make the LMI payments unnecessary.
Guarantor loans can be beneficial; they can help you enter the property market sooner. Contact us today if you want to become a homeowner and have immediate family members willing to help.
Requirements of Guarantor Loans
You will need to meet a few requirements to be eligible to apply for a guarantor loan.
Family members willing to act as guarantors need to be a homeowner. That’s because the equity in the guarantor’s property will form part of your loan security. Home equity is their current property value, minus how much they have left to pay on their home loan.
If you fall into the position of not being able to meet your mortgage repayments, your lender will ask your guarantor to do so on your behalf. That’s why it’s critical to seek independent legal and financial advice for both parties before entering this agreement.
Most lenders will insist on this before accepting a guarantee.
We work closely with financial planners and lawyers, so we can set you up with the right team to provide guidance. The Mortgage Agency believes in a holistic approach to achieving the best results.
The Mortgage Agency Can Help You Through the Entire Process
When you’re considering taking out a guarantor loan, contact a mortgage broker from our team, who will help you through the loan process.
Our guarantor loan specialists will meet and discuss everything with you and the family member involved to ensure you both understand the financial commitments. Having a guarantor to secure your home loan can help you own your property sooner, saving you money on LMI.
The guarantor can request to be released from the loan if you have built sufficient equity in your loan. You can build up your home equity by making additional repayments that decrease the loan’s balance quicker or increase the property’s value.
Whichever path you decide to go, The Mortgage Agency team will be able to provide insight and guidance throughout. We know lenders’ different requirements and can guide your application and plan accordingly.
Not sure why you should use a mortgage broker? We also work with the best interests of the borrower and the guarantor, so we won’t recommend anything detrimental to either party. We believe in a personalised approach tailored to each customer’s needs and financial goals.
Whether you’re interested in guarantor home loans and want more information, or if you’re at the stage of refinancing to release your guarantor, The Mortgage Agency can provide valuable input.
Frequently Asked Questions (FAQs) about Guarantor Home Loans
We get several frequently asked questions from our clients that you might find helpful.
Q: How Much Do You Need With a Guarantor?
In most cases, you can secure a loan without a 20% deposit if you have a guarantor. In other words, when you have a guarantor for your home loan, providing a deposit is unnecessary.
Rather than giving a deposit, the lender secures 20% of the loan against your parent’s property, and the remaining 80% is secured against your own home.
Q: What Credit Score Does a Guarantor Have to Have?
There isn’t a set credit score that a guarantor must have to back a loan. Each financial institution might have different criteria, with the principal concern being the guarantor’s ability to repay the loan if the borrower cannot.
But it is typically presumed that the guarantor must maintain a healthy, financially solid credit record. This is because the lender will conduct a credit check on the guarantor to evaluate their capacity to shoulder the home loan repayments if the borrower defaults.
Q: Does the Guarantor Secure the Entire Loan Amount?
No, the guarantor usually only guarantees 20% of the loan. Remember, the guarantor is there in place of a deposit. They only need to provide enough of a security guarantee to cover what would’ve been secured by the deposit.
Q: How Long Does the Guarantor Stay On Your Home Loan?
Typically, guarantors stay on home loans for around 2 to 5 years, but this largely depends on several factors. For example, how quickly are you paying off your home loan? Or how quickly has the value of your house increased?Maybe even longer if house prices fall.
But, there is no hard-and-fast rule about how long the guarantor must stay on the loan.
Q: How Do You Release a Guarantor From Your Loan?
You generally have to refinance the loan to remove the loan. In this case, the optimal time to do this is when the loan-to-value ratio (LVR) on the existing guarantor home loan is less than 80%, or you’re willing to pay LMI
You can read more in our guide on when a guarantor can be released.