C&G's Guide to the Benefits of Using a Guarantor for Your First Home
While deciding to buy your first home is exciting, saving a deposit for your first home is both hard and time-consuming work. That’s where a guarantor can be extremely helpful to help prospective buyers enter the market sooner.
A guarantor – usually a family member, offers equity in their own home as additional security for your loan. As the homebuyer you’ll still be the main person responsible for making the regular repayments on your mortgage (including any interest and fees), but if you fail to meet those repayments, the person who guaranteed your home loan may become liable to cover them. Therefore, it’s possible to get a home loan even when you have a small deposit. In this C&G Blog, we break down the process and list the top three reasons you should consider using a guarantor to buy your first home.
A guarantor could help you buy property sooner without paying the cost of Lenders Mortgage Insurance
Lenders Mortgage Insurance (LMI) is a one-off, non-refundable, non-transferrable premium that's added to your home loan. It's calculated based on the size of your deposit and how much you borrow. LMI is designed to protect the bank if you are unable to repay your loan. In the case of having someone act as your guarantor, the risk to the lender is already minimised by having the guarantor’s property as added security. Therefore you will not be required to pay for LMI.
A guarantor may help you purchase a property using a deposit below 20% of the lender-assessed value.
A guarantor could also help you secure funding from a bank if you don’t have enough saved for a 20% deposit, and can help reassure the bank that mortgage repayments will be covered even if something unexpected occurs and you can’t pay.
A guarantor offers equity in their property as additional security against your loan.
For example: if you want to purchase a property valued at $500,000 you will need to save a 20% deposit of $100, 000. If you have only saved $25 000, but your guarantor offers equity in their home as security for the loan to cover the outstanding $75,000, you will only need to pay what you have saved and can proceed with your home loan. Once your equity in the home reaches 20%, you and your guarantor can apply to the lender to release the guarantor from their obligations and remove the guarantee.
Remember, you should always seek professional advice and understand your obligations before entering into any financial agreement or guarantee. Contact C&G today for more information about your options!