If you’re saving for your first home, getting to that 20 percent deposit can feel like an impossible up-hill battle. Or perhaps you’re wanting to purchase an investment property, but your lender doubts your ability to make repayments.
If this is the case, then it’s worthwhile considering using a guarantor to help you buy your property sooner. In this C&G blog, we explain what a guarantor home loan is and the things to consider before entering into one.
What is a guarantor home loan?
A guarantor home loan allows family members or, in some cases, someone else who is close to you, to ‘guarantee’ the loan. This means they will be responsible for paying back the loan if you can’t. A guarantor usually has to offer equity (such as a percentage of their own property) as security for part or all of your mortgage.
Typically, the homebuyer will still be the main person responsible for making the regular repayments on the mortgage (including any interest and fees), however the guarantor will have to accept the obligations associated with entering into a guarantee. Usually, this means the guarantor may be liable to cover the costs of the mortgage repayments if you can’t.
There may also be the option for your guarantor to only guarantee a portion of the loan, which would mean once that portion is repaid, they would be free from any risk to their equity should any repayments be missed further down the track.
Who can act as a guarantor?
Lenders generally require your guarantor to be an immediate family member, but some may also allow others such as a close friend or business partner to be a guarantor. Different banks often have different requirements of what makes someone eligible to be a guarantor, however it is usually expected that a guarantor should have:
● A good credit score
● Equity in a property to be used as security
● A stable income
● Be an Australian citizen or permanent resident
How much can you borrow with a guarantor?
This can vary significantly between lenders and will depend on your financial standing as a potential borrower. It will also depend on the circumstances of your proposed guarantor or guarantors, as well as factors like the size of your loan.
Even with a guarantor home loan, expect your lender to assess whether you can afford your loan repayments, along with your track record of saving. Most banks may also require you to save a certain amount towards the deposit even though you have a guarantor.
Is there a risk for a guarantor?
Ultimately, a guarantor is liable to cover mortgage repayments and fees if the borrower is unable to, which is something every potential guarantor should take into consideration from the outset. Usually, a bank will take action on the borrower’s property before making the guarantor pay the outstanding debt.
In cases where guarantors don’t have the equity or savings to cover the debt, they can either apply for a second mortgage on their property or a personal loan. Typically only after these avenues have been explored will banks then resort to selling the guarantor’s property. They will only take enough of the proceeds to cover the loan up to the limited guarantee and the rest of the sales proceeds will then go to the guarantors.
Your next steps
Before applying for a home loan or asking someone to go guarantor for you, it’s generally worth taking a deep dive into your income and living expenses to ensure you have the capacity to repay the loan and have some wiggle room for any unexpected expenses.
It is also a good idea to confirm with your guarantor the amount they are willing to guarantee in advance of entering any formal agreement. Though a family guarantee could help you buy a property sooner without paying the cost of Lenders Mortgage Insurance, it’s important to understand the conditions and obligations of the agreement.
Contact Chisholm & Gamon today to discuss all of your property financing needs!