How a guarantor could help you buy your property sooner

See if you could buy sooner with a family guarantor

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Saving for a home deposit can feel like an endless challenge. But what if you could speed up the process with a little help from your family? Enter the guarantor home loan (also known as a guarantor mortgage). This nifty option could help you buy a home sooner, even if you don't have a 20% deposit. Let's look into how it works and if it might suit you.
 

What are guarantor home loans?

A guarantor home loan allows a family member to use their home equity as security for your loan. This person, known as the guarantor, doesn't provide cash but offers their property as additional security. This can help you avoid Lenders Mortgage Insurance (LMI) and secure a mortgage with a lower deposit.

One common type of guarantor home loan is the Family Security Guarantee. This arrangement involves a family member using their home equity to help you secure a loan. Let's explore how this works in more detail.
 

How a family security guarantee supports your home loan

Here's a simple breakdown of how a family security guarantee works:

1. Your property: You want to buy a property worth $500,000.
2. Your deposit: You've saved $25,000, which is 5% of the purchase price.
3. Your guarantor: Your parents own a home valued at $800,000 and offer $75,000 of their equity as security for your loan. 

With this setup, you would have a deposit of $100,000 (20% of $500,000) so can borrow the full amount needed without saving more, and you won't pay LMI. Once your equity in the home reaches 20%, you and your guarantor can apply to release the guarantor from their obligations.

Benefits of utilising a guarantor for your loan

Opting for a guarantor comes with several perks:

• Buy sooner: Get on the property ladder faster without waiting to save a full 20% deposit.
• Avoid LMI: Save on the cost of Lenders Mortgage Insurance, which can be quite hefty.
• Borrow more: Potentially borrow up to 100% of the property's purchase price, plus additional costs like stamp duty and legal fees.
   

Risks and responsibilities when getting support from a guarantor

While a family guarantee home loan can be a fantastic option for some people, it's important to understand the risks:  

• Guarantor liability: If you default on your loan, the guarantor is responsible for the guaranteed amount. This could mean their property is at risk if they can't cover the repayment.
• Relationship strain: Financial stress can strain family relationships, so it's crucial to have open and honest discussions before proceeding.
• Credit impact: The guarantor's credit score could be affected if they need to step in and cover repayments.  
   

Frequently asked questions

What happens if I can't repay my guarantor home loan?

If you can't make your repayments, your guarantor will be liable for the loan. This is why it's essential to ensure you can meet your repayment obligations before taking out a guarantor home loan.

Can I borrow 100% of the purchase price with a guarantor?

Yes, with a guarantor, you can generally borrow up to 100% of the property's purchase price. Some lenders might even allow you to borrow more to cover additional costs.

How long does the guarantor stay on the loan?

The guarantor can be released from their obligations once your equity in the home reaches 20% and you apply to remove the guarantee.

Does being a guarantor affect my credit score?

Yes, being a guarantor can impact your credit score. The loan will appear on your credit report, and any defaults can negatively affect your score.

If I am a guarantor, do I have to seek independent advice?

It is always recommended that guarantors seek independent financial and legal advice before entering into a guarantee. Guarantors must consider the documentation they’ve been provided by the lender for a minimum of 3 days before the lender can ultimately accept the guarantee. However, if you obtain independent legal advice, this 3 day period may be waived.

Could the guarantor lose their house?

In a worst-case scenario where your guarantor was unable to pay, the lender has the right to sell the guarantor’s property to recover the limited guarantee amount.

Can I use a guarantor for an investment property?

Yes, a family security guarantee is eligible for both owner occupier home loans and investment home loans.
 

To sum up

A guarantor home loan can be a game-changer for those struggling to save a large deposit. By leveraging a family member's equity through a family security guarantee, you can buy your dream home sooner and avoid costly LMI. Just make sure to understand the responsibilities and risks involved, and always seek legal advice before proceeding.

Ready to explore your options? Contact a home loan specialist today and take the first step towards buying a home.