Normally, you’ll need to have a 20-percent deposit when applying for a mortgage to get approved. With the average home in Australia going at about $500,000, the deposit is about $100,000.
For most Aussies, it can be challenging to save enough to get the $100,000 deposit. Well, some people can manage to get the amount after saving for a while. But to some, it’s above their head, and it takes time. But don’t despair, you have an alternative: guarantor home loans.
With guarantor loans, you have the opportunity to own a home. But what are they and how do they work? Let’s find out.
What’s a Guarantor Home Loan?
A guarantor home loan a type of loan where your family member accepts to use the equity in their home to help you secure a loan. In this case, the guarantor provides additional security for the loan.
Most lenders recommend the guarantor to be a close relative, such as your parent, sibling, or grandparent. In some cases, ex-spouses and extended family members can also be accepted.
You’ll have to approach them to accept to offer the guarantee on your behalf before applying for guarantor loans.
How Do Guarantor Home Loans Work?
In these loans, the guarantor accepts to use the equity in their property to guarantee your deposit. To avoid complications, they must own all or most of the property.
With a guarantor, you may need a small deposit or none at all, depending on the property price and the lender’s terms. This arrangement also helps you to avoid the cost of buying lenders mortgage insurance (LMI), which lenders usually require if your deposit is less than 20 percent.
For example, you want to buy a home that costs $500,000, and you have saved $50,000 as the deposit. That’s is 10-percent of the property price. In normal circumstances, you’ll have to buy LMI. But with a guarantor loan, the guarantor offers $50,000 of their home equity to help you attain the minimum deposit requirement.
The good thing is that, once you paid the loan, say, 20 percent, the guarantor home is safe, and they are free of that responsibility.
Who Qualifies As a Guarantor?
Different lenders have different requirements for who can act as your guarantor. The guarantor needs to be someone you share a strong relationship with for banks to accept them.
Most lenders only accept your parents while others accept your siblings and close relatives, depending on your relationship with them. Apart from parents, most banks will approve adult children, spouses, and de facto partners.
Parties that are unlikely to be accepted include work colleagues, associates, and former de facto partners or spouses. Friends are generally not accepted, but some lenders can make exceptions if a term deposit is used as security.
The guarantor must be 18 years old, an Australian citizen or a permanent resident, and the property must be in Australia. They need to have a good credit score, stable income, and the property must have adequate equity.
What Does a Guarantor Need to Provide for a Loan?
In Australia, a guarantor must have sufficient equity in the property. They must prove ownership of the property, and the lender will also want to know more details about the property. The property must also be located within Australia.
If you default, the guarantor is liable for paying the mortgage. But they have the option of limiting the size of the guarantee by opting for a limited guarantee. This means that they’re only liable to a particular agreed amount.
How Much Can You Borrow?
With a guarantor, it’s possible to borrow up to 100 percent of the value of the property. Some lenders can also agree to lend up 110 percent to help you meet other costs of homeownership, such as stamp duty.
The amount you can also borrow will also depend on your case. For example, if you’re a first-time buyer, it’s possible to borrow up to 110 percent of the property value. The amount the guarantor is will guarantee will also determine your mortgage size.
Most lenders will not have a maximum loan size for borrowers. However, if you’re looking for something over $1,000,000, you might be required to meet additional credit requirements.
What If I Can’t Get a Guarantor?
It’s very possible not to find a guarantor. Your parents might be nearing retirement, making them ineligible to most lenders. Or, they might not be willing to be guarantors due to personal reasons.
In this case, you can opt for a low deposit home loan. This type of loan lets you borrow up to 95 percent of the property value. However, you’ll need to buy LMI. For example, if you have a $50,000 deposit for a 500,000 property, an LMI could cost you well over $10,000.
You can also co-buy the property. This means you can get the loan with another person, such as your parents, and buy the property. In co-buying agreements, both parties are responsible for paying the mortgage. Regarding the ownership of the property, you should discuss the issue with the other party.
If your desired property is costly, it’s advisable to buy a cheaper property as an investment. You can rent out the property to build wealth as you continue to save for your dream home.
The last alternative is to continue saving until you reach the minimum deposit requirement. It doesn’t matter how long it will take as long as you’re committed to owning a home.
Getting a guarantor loan has several benefits as you can save money by not buying LMI. The loan is also flexible as you can limit the size of the guarantee. Most importantly, you don’t need a deposit to buy a home.
With that in mind, it’s essential to understand the agreement involved in guarantor loans. Such loans can lead to falling out with your loved ones if you fail to meet your obligation, thus putting their property ar risk. Understanding your responsibilities and the risk involved is crucial.