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These days it is becoming increasingly difficult for first home buyers to save a 20% deposit. If you feel as if you are priced out of the market and are looking for alternative options to fund your leap into the property market we might have the answer.
Here we’ll explain what a guarantor is, how a guarantor home loan works and how you might be able to get one.
Guarantor loans are designed for those with a small deposit, or no deposit at all. A guarantor is a ‘third party’ to a home loan, they are typically either a parent or close family member who will use some of the equity in their own property secure a home loan for another person, usually a close family member.
Read our guide to LMI and how you could paying avoid it here.
A guarantor allows the equity in their own property to be used as additional security for another borrower’s home loan. Their own equity value needs to be sufficient to cover 20% of the new property’s value.
The guarantor’s property (the guarantee) assists you, the borrower, in the payment of your deposit. The primary security for the home loan will be the new property, but the lender will also take a loan out over the guarantor’s property.
Signing a guarantee is a binding contract that may require the guarantor to pay the entire loan back if the borrower cannot, including additional fees like Lenders Mortgage Insurance and stamp duty. (Naturally the sale of the new property will allow for repayment of a substantial amount of the debt).
The lender will take a home loan out over the guarantor’s property, which will remain in place until the guarantee expires, or until it is removed.
The guarantor can be removed from the loan once the value of the guarantee has been paid off, or the value of the new home has increased sufficiently to meet with the bank's lending policies, normally but not exclusively that the remaining loan balance(s) is not more than 80% of the increased value of the property.
You could potentially borrow up to 100% of a property’s value with a guarantor home loan.
Keep in mind that your guarantor is not regarded as a co-applicant on your loan, but their property is used as security and this means that your lender will hold the title for their property while they remain guarantors to the new 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.
The guarantee can be released and the guarantor’s responsibility can be stopped without the loan being repaid in full. A guarantor can be removed once the guaranteed portion of the loan is repaid in full, or providing a valuation can show the debt level is below 80%.
Guarantor loans are not granted lightly. Not all lenders will accept a family guarantor and those that do have specific requirements regarding applications of this kind to ensure that the guarantors are aware of their obligations and are protected.
Borrowers must provide evidence of:
an outstanding credit history
a stable job
a steady and consistent income
ability to repay the entire loan with their own income
Guarantors must have:
a good credit history themselves
a strong asset and equity position
We can help find a lender and loan option that fit your requirements. Chat with a Home Loan Specialist to find out what you may be eligible to apply for.
Learn more about buying a property by reading our guide to home loan deposits here.
A guarantor needs to be a direct, or immediate, family member such as a parent or sibling, however, some lenders allow grandparents and extended family to be guarantors in certain circumstances.
A guarantor is not a co-applicant for the home loan and so aren’t included on the loan and are not responsible for the loan repayments, provided the repayments commitments are met by the borrowers.
Yes, the guarantee can be removed from your home loan on the grounds that the value of the guarantee on the loan has been paid off, and the remaining repayments on your home loan can be repaid without any assistance.
Not sure where to start? Speak to a Lendi Home Loan Specialist for free, expert advice.
Agreeing to be a guarantor should take a great deal of thought since if anything were to go wrong the guarantor could be left with a huge financial burden.
For example, if the home buyer fails to make their repayments, the loan then becomes the responsibility of the guarantor. If the guarantor cannot make the repayments they could be forced to sell their home in order to repay it. Therefore, it’s important that all parties consider the possibilities before entering this contract.
Benefits of getting a guarantor home loan:
A guarantor home loan can help borrowers avoid paying Lenders Mortgage Insurance (LMI), or receive a home loan that could potentially be over 95% percent of the value of the property.
Buying your own home sooner
Borrowing more money than you would otherwise be able to
Avoid paying Lenders Mortgage Insurance (LMI)
Parents or family members do not need to contribute any funds of their own
Drawbacks to being a guarantor:
Guarantor home loans are helpful for borrowers struggling to come up with a deposit, but for the guarantor there are risks to consider before going down this path.
The guarantor may be restricted from borrowing against their own assets until the loan is paid off in full.
If the borrower cannot manage the repayments, the responsibility of the loan repayments will fall on the guarantor.
The guarantor could potentially lose their property (asset used as a guarantee) if the borrower defaults and neither party is able to repay the loan.
Show proof of savings: While most lenders do not require proof of savings or a deposit when taking out a guarantor home loan, some lenders may require proof of 5% of the price of the property in your possession. Other lenders will not require this but instead analyse your credit score to determine if the loan will be approved.
Ability to repay the loan: Since the guarantor is not a co-applicant for the loan, you must also prove that you will ultimately be able to afford and support the loan yourself out of your own income sources. In other words, you wouldn’t expect your guarantor to pay off the entire loan for you, and your lender doesn’t expect them to either.
Good credit history: Guarantor home loans are seen as being slightly more risky for lenders (that’s not to mention the risks for the guarantor), so having good credit history is important. If you have missed any payments or have any outstanding bills, pay them off before you apply, as any marks on your credit history can work against you.
Your guarantor’s equity: The guarantor needs to have enough equity in their property to fund 20% of the new property’s value. Some lenders will allow up to 27% to be used to cover associated costs such as stamp duty and legal fees. You can calculate equity here.
Independent legal advice: All lenders recommend guarantors get independent legal advice, and some will even mandate it.
Strict lending criteria needs to be met in order for a no deposit, 100% LVR loan to run smoothly. If you can meet all of these home loan requirements, you could qualify for a guarantor loan.
Both parties, borrower and guarantor must demonstrate repayment capability
Both parties must be comfortable with the loan repayments
Family and job security needs to be considered before the application process
Both the borrower and the guarantor should possess a good credit score
Borrowers must have repaid outstanding debts before applying
Borrowers must have stable and ongoing employment to make any loan repayments
Here at Lendi, we help a lot of borrowers get approved for guarantor home loans. Speak to a Lendi Home Loan Specialist for advice specific to your situation.
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