A Guide To Guarantor Mortgages and Their Benefits
Saving for a deposit to buy your first home is the biggest challenge most aspiring homebuyers face. Without a 20% deposit, you might face additional fees and charges imposed by a lender such as Lenders Mortgage Insurance. But there are ways to reach your goal of having a place of your own even if you don’t have the full deposit. A guarantor home loan is one solution you may want to consider. But what exactly is it and how does it work?
A guarantor home loan, also known as a guarantor mortgage, allows homebuyers to secure a loan with the help of a family member who acts as a mortgage guarantor. This type of loan is particularly popular among first-time buyers struggling to save a large deposit. The guarantor offers their own property or savings as additional security, enabling the borrower to access better lending conditions, such as a higher loan-to-value ratio or avoiding LMI (Lenders mortgage insurance).
How Does A Guarantor Mortgage Work?
In a guarantor home loan, the guarantor, usually a close relative such as a parent, grandparent or sibling, pledges their home equity as collateral for the loan. This reduces the lender's risk, making it easier for the borrower to qualify for a loan or secure a larger loan amount. Here’s how it typically works:
Application: The borrower applies for a home loan and the guarantor agrees to secure part of the loan, usually up to 20% of the property value.
Security: The guarantor’s property is used as additional security, which means the lender can potentially claim this if the borrower defaults.
Repayment: The borrower is solely responsible for repaying the loan. The guarantor is only called upon if the borrower fails to meet their repayments.
Release of Guarantor: Once the borrower has paid off enough of the loan, typically reducing the loan-to-value ratio to 80% or lower, the guarantor can apply to be released from the obligation.
Do You Need A Deposit If You Have A Guarantor?
One of the biggest advantages of a guarantor home loan is the potential to buy a home with little to no deposit. This is particularly beneficial for first-time buyers who may struggle to save the typical 20% deposit required by most lenders. However, the exact need for a deposit depends on a few factors:
No Deposit Required: In many cases, having a guarantor means you can borrow up to 100% of the property value, eliminating the need for a deposit entirely. The guarantor's property or savings act as additional security, allowing the lender to overlook the lack of a deposit.
Reduced Deposit: Some lenders may still prefer the borrower to contribute a small deposit, even with a guarantor. This shows the borrower’s commitment and reduces the overall risk. The required amount is often much lower, such as 5% of the property value, compared to the standard 20%.
Additional Costs: While the guarantor can help you avoid a large deposit, it's essential to account for other upfront costs associated with buying a property, such as stamp duty, legal fees, and any inspection costs. Having some savings set aside can help cover these additional expenses.
Creditworthiness: Lenders will still assess the borrower’s creditworthiness, income stability, and ability to repay the loan. A guarantor doesn’t replace these requirements but rather complements them, offering an extra layer of security for the lender.
Key Takeaway
If you have a guarantor, you may not need a deposit to secure a home loan. However, it’s always wise to have some savings available to cover other upfront costs and demonstrate financial responsibility. A guarantor home loan offers a pathway to homeownership sooner, but it’s essential to understand all the financial commitments involved for both you and your guarantor.
Home Loan Guarantor Requirements
To secure a guarantor mortgage, certain requirements must be met by both the borrower and the guarantor:
Borrower Requirements:
Must meet standard lending criteria, including demonstrating income and financial stability.
Must commit to repaying the full loan amount.
Must be purchasing a property for owner-occupancy or investment purposes.
Guarantor Requirements:
Must be an immediate family member (usually parents) and own property with sufficient equity.
Must have a stable financial position and be aware of the risks involved.
Must seek independent legal and financial advice before proceeding.
How Long Does A Guarantor Stay On A Mortgage?
The length of time a guarantor stays on a mortgage depends on how quickly the borrower can build equity in the property or reduce the loan-to-value ratio. Generally, the guarantor remains on the loan until:
The borrower has repaid enough of the loan, reducing the risk to the lender.
The property value increases sufficiently to bring the loan-to-value ratio below 80%.
A formal application is made to the lender to release the guarantor, often after a reassessment of the borrower’s financial position.
Features and Benefits of a Family Guarantee
Having a family member act as a guarantor can be incredibly beneficial for aspiring homeowners. Here are some key features and benefits:
Lower Deposit Requirement: With a guarantor, borrowers can secure a loan with little to no deposit, helping them get onto the property ladder faster.
Avoiding Lenders Mortgage Insurance (LMI): By using the guarantor’s security, borrowers can avoid costly LMI, which is usually required when borrowing more than 80% of the property’s value.
Improved Borrowing Power: A guarantor home loan can increase the borrower’s purchasing power, allowing them to buy a property that might otherwise be out of reach.
Faster Loan Approval: Lenders are often more willing to approve loans with guarantors, leading to quicker approval times.
Is a Guarantor Home Loan Right for You?
A guarantor home loan can be an excellent solution for those struggling with a deposit or seeking to avoid LMI costs. However, it’s important to understand the responsibilities and potential risks involved for both parties. Before proceeding, speak with a financial advisor or mortgage broker to assess your situation and determine if a guarantor mortgage is the right fit.
If you’re considering a guarantor home loan, CJG Finance is here to help you navigate the process and secure the best loan for your needs. Contact us today or give Colin at CJG Finance a call on: 0402 413 917 or email him: cgreen@cjgfinance.com.au
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