Struggling to save a deposit? If so, you might want to consider a guarantor loan, which allows you to borrow up to 105% of your property’s purchase price.
But what’s a guarantor loan? How does it work? And what are the risks?
A guarantor home loan is when a family member promises to pay part or all of your mortgage if you default, using the equity in their home as security (or collateral).
A guarantor home loan means you can:
Enter the market sooner, as you don’t need to save a full deposit
Increase your chances of getting approved – as a guarantee reduces the risk to the lender
Avoid lender’s mortgage insurance (a one-off fee borrowers are typically charged if their deposit is less than 20% of the property’s value)
Guarantors are generally limited to spouses or immediate family members, such as a parent, grandparent or sibling.
The guarantor isn’t required to make any payments on your loan (unless you default). So to qualify for a guarantor loan, you must prove to the lender you can service and afford the entire loan.
Let’s imagine you want to buy a property worth $800,000. You’ve saved a deposit equivalent to 10% of the property’s value ($80,000). However, to avoid paying lender’s mortgage insurance, you need 20% ($160,000), plus any applicable stamp duty costs.
But if your parents act as guarantor, they can offer $80,000 of their own home equity as extra security for your loan – giving you the additional security you need.
Your property will be the primary security for the loan. But the lender will also take a mortgage over your parents’ property.
Having a guarantor can help you get onto the property ladder faster. However, it can be risky for the guarantor, as they’re liable for the loan if you default. Also, their borrowing capacity may be reduced during the guarantee period.
A limited guarantee is when a guarantor secures only part of the loan, rather than the entire amount, which reduces the risk for the guarantor.
Lenders release the guarantor once the loan falls below a certain percentage of the property value (generally 80%).
Your guarantor still needs sufficient equity in their property for the deal to go ahead.
Not all lenders offer limited guarantee home loans.
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We appreciate your message and a Shore Financial broker will respond to you within a few short days. In the meantime, here’s a few links to keep you occupied.
