It can be difficult for home buyers, particularly those seeking looking to purchase their first, to amount enough savings for a significant home loan deposit. Having a guarantor can eliminate this hurdle, helping you to break into the property market sooner rather than later.
What is a guarantor home loan?
Put simply, a guarantor home loan is one that requires a portion of the loan to be backed up by a guarantor. This is generally restricted to immediate family members such as a parent or guardian, or in some cases, close friends. Like a typical home loan, a guarantor home loan will require you to borrow money from a lender and repay the amount over time, however your guarantor provides security for the loan that you would normally have provided in the form of a deposit.
This means if you find yourself unable to make your loan repayments, your guarantor is liable to cover them. If in the unfortunate event they also cannot meet loan repayments, you could lose your home, and your lender could recoup any additional debt owing via the guarantor's home as well.
While these arrangements usually work well, there's always the chance that the guarantor will have to fulfil their promise to the lender and make repayments on the mortgage if you're unable. This can be a burden on the guarantor, and it's a big ask, so you want to make sure you're asking the right person.
Qualifying to act as a guarantor
Most lenders will generally require a guarantor to be a close family member, such as a parent or partner, though some lenders may allow other relatives to be guarantors, like a sibling or grandparent.
Many banks will have different eligibility requirements of who can be guarantor, but the following will typically apply:
- Regular and stable income.
- Aged between 18 and 65.
- Strong credit history with no defaults.
- Sufficient equity in their home (typically at least 80%), or they must own their home outright.
- Guarantor's property must be located within Australia.
How much can I borrow with a guarantor home loan?
Guarantor home loans can allow you to borrow more than 80% of the property's value without paying LMI - lender's mortgage insurance. Some lenders even allow you to borrow 100% or even 110% of the property's value if you have a guarantor to back you up.
This means you can potentially buy a home with no deposit at all, and even get some extra to pay for things like stamp duty and other establishment costs such as conveyancing and the first set of strata levies and council rates. Of course, this will heighten your mortgage repayments, so you want to make sure you can afford it - otherwise your guarantor is on the hook.
Guarantor home loan: an example
Simon and Andrea have their sights set on a $600,000 house, yet combining their savings they have amassed enough for a 10% deposit to put down, equivalent to $60,000.
Given the deposit is less than 20%, Simon and Andrea will be required to pay Lender's Mortgage Insurance (LMI). Thankfully, Simon's parents own their house outright and so they agree to become guarantors, offering a guarantee for a further $60,000 of the total loan, which brings the deposit up to the required 20%. This means that Simon and Andrea will not have to pay the additional expense of the LMI, which would have resulted in greater monthly mortgage repayments.
To help you identify how much you could potentially save on LMI with a greater deposit, InfoChoice's Mortgage Calculator can help take out the guesswork.
Benefits of guarantor home loans
Enter the property market sooner rather than later
For many, the hurdle isn't the mortgage payments, but saving up enough to get their foot in the door. Taking advantage of a guarantor home loan can allow you to get onto the property ladder sooner. This means not only will you have your own property, but it also means you can start paying off the loan, building up equity and possibly making capital gains.
Using a relative or close friend as a guarantor when you may not have a sufficient deposit can result in you avoiding LMI expenses, if your guarantor is willing to offload enough equity to satisfy the 20% deposit. LMI is an insurance policy that protects the lender, and can add up to thousands or even tens of thousands of dollars. Further, if it's capitalised into the loan, you're paying interest on it.
Increase chances of mortgage approval
Having a guarantor can increase your chances of getting your mortgage application approved as there is an added layer of security for lenders.
Risks of guarantor home loans
If the borrower is unable to make their loan repayments due to a change in financial circumstances, the guarantor is then liable to cover the mortgage repayment. If they also can't make the repayments, the guarantor could end up being forced to sell their home to repay your loan.
There also lies the potential to tarnish the guarantor's credit rating if the borrower or the guarantor is unable to meet mortgage repayments.
Equity build could be slower
If you are borrowing 100% of the property's value, this provides less of a buffer if property prices head south. It will also take you longer to build up equity because you have less 'skin in the game'. If you are looking to refinance after a certain period, many lenders also require you to have at least 20% equity or deposit to refinance without paying LMI.
Mortgage repayments could be too high
In the right circumstances, a guarantor mortgage is a useful solution, but if the pledged amount is uncomfortably high and you're unable to meet your monthly repayments, your guarantor could lose their property. If you're borrowing 100-110% of the property's value, the mortgage payments on this will be higher than a traditional 80% LVR home loan.
Family and money might not mix well
Finances and family don't always mix well, so you need to be sure that you'll be able to cope with the situation and work out what to do if things go wrong.
As a home buyer you'll want to ask the right person, who is financially comfortable and who you feel won't meddle too much in your finances. You don't want there to be tension if you decide to take a holiday and if they feel that money might be better put towards the mortgage.
Factors to consider if you are considering becoming a guarantor
The main question is: Can you afford it? If your relative suddenly loses their job, can you release equity from your property, or afford to pay the shortfall out of savings or earnings?
Can your relative afford the mortgage? You need to see evidence, rather than going with your feelings because you want them to own their own home.
Do you have a close enough relationship with the borrower? If you think you might begrudge them going on holiday because you want them to make mortgage overpayments, this could end badly.
Do you understand what you're doing and what your obligations are? Talk to a solicitor even if you think you do.
What can I do if I don't have a guarantor?
Not everyone is fortunate enough to have a guarantor, but your parents and other relatives might be able to help you in other ways, maybe by paying your removals costs or by helping you to decorate your new place.
If you do have to do things alone, then there are still ways to place a foot on the property ladder.
Apply for a low–deposit home loan
Some lenders will let you borrow up to 95% of the property value, however your LMI premium could potentially balloon to a large sum. You can, however, capitalise your LMI by bundling it into your mortgage so you pay it off monthly.
Co-buy with your parents or another relative
This means you obtain a home loan with your relative and purchase the property together. While you'll be making the repayments yourself, you and your relative will be equally liable for the repayment of the entire loan. This sort of arrangement can make ownership a bit complicated, so it's important to involve a solicitor to flesh out the finer details.
Increase your savings efforts
It's important that those seeking to jump on the property ladder keep saving and then save some more. Increasing your saving efforts has the potential to save you thousands in both LMI and interest expenses over the duration of your home loan.
Use government shared equity and home buying schemes
Federal and state governments typically have programs designed to give first home buyers a leg-up into the property market. This could include anything from stamp duty concessions, cash grants, and shared equity programs where the government owns a stake in your property and pays some of your deposit.
Other programs such as the first home loan deposit scheme allow you to enter the market with as little as 5% deposit without paying LMI. However spots on these programs are typically limited, so you'll want to do your homework.