Saving the deposit for your first home can be difficult and take a number of years. One way to potentially get into your own home sooner is by having a family member act as a guarantor.
You might have heard about guarantor home loans (also known as a Family Pledge Guarantee), and how they can help first home buyers crack into the difficult property market. Sometimes referred to as ‘the bank of Mum and Dad’, guarantor home loans are a great way to get into a new home sooner – provided you can find a willing guarantor.
Many lenders allow parents or someone who is close to you, to use the equity in their property as security for your home in lieu of you saving the full deposit required. This person is known as a guarantor.
How does a Guarantor Home Loan or Family Pledge Guarantee) work?
With a family pledge guarantee, your mum and dad can provide their home as security to the loan, so you don’t need to save the full deposit required by the lender.
The easiest way to explain this is to give you an example.
If you were looking to buy a house valued at $600,000, you would need to save a minimum 5% deposit or $30,000.
To avoid paying mortgage insurance you need a deposit of at least 20% of the purchase price of $600,000 or $120,000. That’s another $90,000 you would need to save!
Now, your mum and dad have a home valued at $900,000 and are willing to help you out. They offer you the $90,000, but not as cash, as security for the loan. This means the lender will take the offered security of $90,000 in your parents’ home so you don’t have to pay the mortgage insurance premium and don’t have to save that extra money!
Once the equity in your home reaches 20%, you and your parents can apply to the lender to release the guarantee.
The guarantor’s security (i.e. mum and dad’s home) does not cover the entire loan amount. Just a portion of it in lieu of you having to save the full deposit. The guarantee is limited to this amount.
How is it different to being a co-borrower?
A co-borrower on the loan is someone who is responsible for the entire loan until the debt is repaid in full as compared to a guarantor who is linked to the loan by a guarantee and is responsible for the amount specified in the guarantee.
A guarantor is linked to the loan by a guarantee. This guarantee can be released and the guarantor’s responsibility will cease without the loan being repaid in full.
Who is an eligible guarantor?
Guarantors are generally limited to immediate family members. Normally, this would be a parent, but it can include siblings and grandparents.
There are also conditions around the property being offered by the guarantors. The property must be located in a place acceptable to the bank and it must have sufficient equity available in their property to offer the bank without the need for LMI.
If we use the above example, if your parents’ home was valued at $900,000 but they had a mortgage of $720,000 there would not be enough equity in their home to offer a guarantee as their existing home loan would require LMI to go above the $720,000 already committed.
In another scenario the parents might have a loan of $500,000. Which when we add the $90,000 guarantee would put the loans secured against the parent’s property at $590,000. This would be 65% of the $900,000 value and would not require LMI and is acceptable.
Benefits of a Guarantor Home Loan (Family Pledge Guarantee)
There are several benefits to taking out a guarantor home loan. Let’s look at some of the key benefits.
Avoid Lenders’ Mortgage Insurance
The costs associated with LMI premiums are avoided when a guarantor is used, this can save a significant amount.
For more information on LMI refer to our LMI fact sheet or speak to your mortgage broker.
It is important to remember that as the borrower, you will be responsible for your loan repayments and you’ll need to be able to service the entire loan with your income. You should always speak with your broker about ensuring you are comfortable that you can afford the loan repayments that will be required.
Other possible benefits of a guarantor home loan include:
- You may not have to save as much for a deposit
- You could get into the property market faster and more easily
- You can get the home you have fallen in love with and not have to settle for a cheaper alternative
Things to keep in mind when considering a Guarantor Home loan
While there are clearly some benefits to going guarantor, given it’s such a large financial commitment, it’s also worth weighing up the potential risks.
Taking on the role of a guarantor is not something that should be taken lightly. Anyone considering being a guarantor for a property loan is advised to seek independent legal and financial advice before accepting the role. In fact, most lenders will insist on this, prior to accepting a guarantee.
It’s important to remember this is only a guide to help you ask the right questions and highlight the important considerations.
How can BrokerCo help?
Normal lending criteria and bank policy applies to guarantor loans, so you should discuss your borrowing eligibility with your mortgage broker.
BrokerCo offers a convenient online and/or in person service to help you compare home loan options based on your needs.
Our team of experienced mortgage brokers listen carefully to your home ownership goals to understand how to help you best. We carefully analyse your current circumstances and find the best home loan products from more than 40 lenders. Plus, we’re not aligned with any particular banks or lenders, which means you always get honest, independent advice. If you’d like to know more about how we can help, contact our friendly team today. https://brokerco.com.au/contact/