So, you’re trying to buy a house. You need a home loan, but you don’t think you have enough savings for a deposit. Not all hope is lost – in fact, there’s a solution we brokers are seeing more and more often. Many first home buyers are applying for loans using a guarantor. Don’t know what that is? Let us break it down.
The go with guarantors
A guarantor is someone, usually a parent, who offers their own property as additional security on your loan. This allows you to borrow 100% of the purchase price plus costs for stamp duty and legal fees.
Having this additional security means you only need to contribute a small – or even no – deposit yourself. This way, you can be in your own home sooner and avoid thousands of dollars in lenders mortgage insurance.
Lenders mortgage insurance is a one-off payment charged by lenders to borrowers they consider a high financial risk. Your risk factor is determined by your loan-to-value ratio (LVR), i.e. the amount you wish to borrow divided by the lender’s valuation of the property you want to buy.
Lenders usually like to have at least a 20% buffer, so in the unfortunate case you have to default on your loan, they stand a good chance of recouping the loan amount by selling your property. (Remember, this is worst case scenario!)
If you have a guarantor, your bank will consider you to have a 20% deposit or higher with your application – thus eliminating the need for LMI!
What you need to know
Keep in mind that by becoming guarantors, your parents are liable to the same risks you are if you default on your payments. Most banks will assess your parent’s income to ensure they can service the portion of the loan that is being guaranteed. If you then default, the bank will ask your guarantor to assist with repayments rather than just selling the properties related to your loan.
We will usually structure your loan in a way that will see the guarantor portion paid off faster, so we can release their property and give them peace of mind.
Guarantors have the option of utilising a limited guarantee, which allows them to minimise the amount of guarantee or equity used. The beauty of this is they can then use the remaining equity for other uses such as for their own investments or even be the guarantor for more than one child.
If your parents choose to be your guarantor, we involve them in the whole application process and encourage them seek independent legal advice to ensure they are aware of all the risks.
If you have any more questions, feel free to give me a call on 0413 437 389 and I’d be happy to arrange a no obligations meeting so that we can discuss it further.
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