For many, the biggest hurdle to achieving home ownership is saving enough for a deposit. With house prices continuing to soar, many Australian first home buyers are turning to relatives for help via a guarantor agreement to achieve home ownership sooner.
Becoming a guarantor for your family members essentially means you are using your own property as collateral to help secure a mortgage for a family member. However, before taking on this role, it is crucial to have a complete understanding of its full implications—both the risks and the potential rewards.
Understanding the Guarantor’s Role
How It Works
Opting for a guarantor home loan can be a game-changer, particularly for first-time buyers.
This arrangement can significantly lower the entry barriers to purchasing a home, often reducing, or in some cases, even eliminating the need for a traditional down payment.
A guarantor can also be used in a way to avoid the cost of Lenders Mortgage Insurance (LMI), which could save you thousands of dollars when purchasing a home with a deposit that is smaller than 20% of the value of the loan.
Understanding How a Guarantor Home Loan Can Help
Let’s say your child has found the perfect house that is listed at $700,000. They have been saving up and have managed to put together $70,000, which covers 10% of the asking price.
Normally, if an individual is borrowing more than 80% of a property’s value, they would be required to pay lenders mortgage insurance (LMI), adding a significant cost. In this example, a 20% deposit would require $140,000 deposit.
This is where having a guarantor can be a game changer. The guarantor can offer $70,000 of their own home’s equity, to help secure your loan. It’s important to note that guarantors are not offering their entire property against the loan, but only the amount needed to reach the 20% deposit—in this example, $70,000.
By providing this additional $70,000, the down payment coverage reaches 20%, satisfying the lender’s requirements and allowing the buyer to avoid the extra expense of LMI.
In this arrangement, the guarantor doesn’t make any monthly payments. They serve as a financial backup. If the borrower faces financial difficulties and cannot make mortgage payments, the lender will turn to the guarantor to cover the shortfall. However, lenders typically explore many options to resolve the situation before involving the guarantor.
This support can make a significant difference in helping your child secure their dream home without the added burden of LMI.
Do Guarantor Home Loans Come with Additional Costs?
Guarantor home loans usually don’t carry higher interest rates than standard home loans and can often offer competitive terms under names like “family pledge loans.”
It’s essential, however, to choose a loan that fits the borrowers needs and to stay mindful of potential changes in interest rates over time.
Key Considerations Before Becoming a Guarantor
When considering the role of a guarantor, remember that lenders have varying policies. Often, you can decide the portion of the loan you’re willing to guarantee and the duration of your commitment, meaning you can choose an amount to guarantor that you are comfortable with.
It is important to carefully evaluate the borrower’s financial stability and job security. Trusting that the borrower can manage a mortgage is important, but it’s essential to base your decision on objective financial facts.
Consulting with independent legal and financial advisors before becoming a guarantor is required by most lenders to ensure that all parties understand the implications fully.
Considerations of becoming a guarantor
Financial Responsibility: If the borrower fails to make their repayments, as a guarantor, you are liable. This could impact your own finances as you are expected to cover the amount unaccounted for.
Borrowing Capacity: Once you become a guarantor, your ability to borrow in the future decreases as lenders will consider the guaranteed loan as part of your liabilities.
Advantages of Having a Guarantor
Homebuyers benefit significantly from having a guarantor:
- Lower Deposit Requirements: It’s possible to secure a mortgage with a minimal or even no deposit, reducing the initial financial burden.
- Avoiding LMI: By having a guarantor, borrowers can often sidestep the need for Lender’s Mortgage Insurance, which can save thousands of dollars.
These advantages can make home ownership accessible sooner than it might otherwise be, providing a substantial financial head start.
Loan Duration and Release
A guarantor is typically tied to the mortgage until the loan is either paid off, refinanced, or until special arrangements are made with the lender.
There might be an option to request a release from the guarantor duties if the borrower has built sufficient equity (often around 10% to 20% of the loan value) and has a consistent repayment history.
We Are Here to Help
By thoroughly understanding these aspects, you can make an informed decision that supports your loved one’s homeownership goals.
Get in touch with our experienced team of brokers today so we can help you navigate the complexities and secure the financing needed to achieve your homeownership goals.
Call us on 6162 2740 or email us at enquiries@dominionfinance.com.au to make an appointment today.
