What Is A Guarantor Home Loan?

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:

1. 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.
   

2. Security: The guarantor’s property is used as additional security, which means the lender can potentially claim this if the borrower defaults.
   

3. Repayment: The borrower is solely responsible for repaying the loan. The guarantor is only called upon if the borrower fails to meet their repayments.
   

4. 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:

1. 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.
   

2. 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%.
   

3. 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.
   

4. 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

The information contained in this post is for general guidance only and does not constitute personal advice. It's important to do your own research as regulations, fees and charges change over time.