A guarantor home loan could help you enter the property market sooner and with a lower deposit, thanks to the help of a close family member.
But it does come with considerable risks for the person guaranteeing your loan, especially if you’re unable to meet your repayments.
Here’s what you need to know about guarantor home loans:
How do guarantor loans work?
If you can’t save a large enough deposit for a home, a family member can become a guarantor by providing the extra security that lenders need to approve your loan.
In most cases, the guarantor uses the equity in their own property as security for the amount you borrow.
This guarantee is typically for just part of your loan, to cover the portion you can’t afford on your own.
A common reason people use guarantors is to avoid paying for lenders mortgage insurance (LMI), which usually applies if your deposit is less than 20%. LMI can add thousands of dollars onto the total loan amount.
Let’s say you want to buy a property worth $500,000.
You’ve saved $25,000 for the deposit – on top of other upfront costs like building inspections and stamp duty (if ineligible for first-home buyer concessions).
That’s 5% of the purchase price.
To get a home loan without having to pay for LMI, you’d usually need to save another 15% of the purchase price, or $75,000.
That’s where a guarantor can help.
A guarantor – usually a close family member – could put forward $75,000 of the equity in a property they own as security for your loan.
Who in the family can be a guarantor?
A guarantor is generally restricted to immediate family, but exactly who can become a guarantor varies from lender to lender.
People who can often act as a guarantor:
Some lenders will allow extended family members, such as cousins, or even ex-spouses to act as a guarantor to your loan.
Your Smartline Adviser can help you understand which lender best suits your needs.
How much can I borrow with a guarantor home loan?
With a guarantor, some lenders may let you borrow up to, or even above 100% of the value of the property, which can help with other upfront costs such as stamp duty.
Other lenders may want to see a deposit of at least 5% in genuine savings, even with a guarantor.
Regardless, the lender will want to see that you have the capacity to meet your repayments each month by looking at your income and expenses.
Can you buy an investment property with a guarantor home loan?
In many cases a family guarantee can be used to buy an investment property, however some lenders restrict purchases to owner-occupied properties.
When can you remove the guarantee?
You can apply for the guarantor to be released from the agreement once you’ve paid off enough of your loan, or the value of the property has risen enough to cover the guaranteed amount. You will still need to owe less than 80% of the value of your property to avoid LMI.
In some cases, you may need to pay a lender discharge fee, or pay to have the property revalued.
Are there risks in becoming a guarantor?
Becoming a guarantor on a loan is a serious commitment and shouldn’t be taken lightly.
If you default on your repayments, the bank will look to your guarantor to make up the difference in what is owed.
Guarantors, therefore, usually need to have the capacity to make repayments if necessary.
Some risks of going guarantor:
- If the borrower can’t make the loan repayments, some lenders may require a guarantor to pay back the full loan amount. If they’re unable to meet these repayments, they could lose their home if it was used as security for the loan.
- It could stop the guarantor from getting another loan or affect their future borrowing capacity.
- It could damage your relationship if the borrower defaults on their loan.
Mixing family and money has the potential to be problematic. Both parties must trust each other completely and guarantors must fully understand their commitment.
Guarantors should get financial and legal advice before signing a guarantee.
DISCLAIMER: The information contained in this article is correct at the time of publishing and is subject to change. It is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, Smartline recommends that you consider whether it is appropriate for your circumstances. Smartline recommends that you seek independent legal, financial, and taxation advice before acting on any information in this article.