Saving a 20% house deposit can be challenging. According to a recent analysis by Realestate.com.au, single first-time buyers in NSW take about 8.3 years to save for a 20% deposit. Saving half the amount to put up a 10% deposit takes about 4.3 years, and there may be additional Lenders’ Mortgage Insurance (LMI) costs to pay. These figures assume house prices won’t rise, which we know isn’t likely. So, the actual number of years to save for a 20% deposit on your first home could be much more if property prices rise, leading to a higher deposit requirement.
But what if you don’t want to wait that long to purchase your first home? One of the options you have is finding someone to be a guarantor on your home loan to help you get onto the property ladder faster.
What is a guarantor home loan, and how does it work?
If you don’t have a 20% deposit, you can ask a family member, such as your parents or siblings, to guarantee your mortgage, enabling you to borrow money with a low deposit, and without paying for LMI.
To set up the loan, the lender will take additional security over the guarantor’s property to reduce their risk in lending you more than 80 per cent of the new property’s value. The home you are buying will continue to serve as the primary security for the loan, and you’ll be required to make regular repayments on it. However, if you fail to make your repayments, the guarantor may become liable to cover those repayments.
If something goes wrong, such as when your guarantor also cannot meet the repayments, the lender may take possession of your property and sell it to clear your debt. However, if there’s a shortfall in the sale proceeds, the lender may take possession of the guarantor’s property to clear the debt.
Some lenders also allow a partial guarantee, which means your guarantor could guarantee a part of the loan. Once that portion is paid off, they can be released from the mortgage so that they are no longer at risk if you cannot make repayments in the future.
Who can guarantee my home loan?
Most lenders only allow immediate family members, or someone with a close relationship with you, to be a guarantor on your home loan. This would typically include your parents, grandparents, partner and siblings. Additionally, lenders consider several other factors before approving an individual as a guarantor. Some of the common requirements include having a high credit score, adequate home equity and proof of steady income. The guarantor must also be a citizen or permanent resident under 65 years of age.
How much can I borrow with a guarantor?
You can borrow up to 100% of the property’s purchase price, or even slightly more, depending upon the lender you are applying with. There’s no limit on the loan size you can borrow, but additional criteria may apply if you wish to borrow more than $1 million.
What are the benefits of taking out a guarantor home loan?
A guarantor can help you get into your property sooner by enabling you to qualify for a home loan without waiting to save a 20% house deposit.
Home loans with an LVR of more than 80% are considered risky, and you are required to pay for LMI, which is a type of insurance that protects the lender if you default on your home loan. Depending on the size of your loan, the cost of LMI can run into thousands of dollars. However, if you have a guarantor, you can avoid paying for LMI by reducing your LVR to below 80%.
High LVR loans also come with a higher interest rate, but a guarantor could help you qualify for loans with more competitive rates.
Is there any downside of a guarantor home loan?
If you think you may not be able to afford your home loan repayments in future, asking a family member to guarantee your home loan could jeopardise their future and potentially cause a rift in your relationship. Suppose your parents have decided to be a guarantor on your home loan. It means your parents will be responsible to cover your mortgage repayments if you fail to pay. Depending on their financial circumstances, this could put their hard-earned savings or even their home at stake.
If you do take out a guarantor home loan, you can minimise the risk to the guarantor by removing them from the loan once your loan amount is less than 80% of the property’s value. However, each lender will have different criteria for having the guarantor removed from the loan, and it’s worth getting this information before you sign up for the loan.
Some lenders also allow you to provide a partial guarantee covering a portion of the loan. This option can help reduce the guarantor’s risk by limiting their liability to only a part of the loan. You may consider getting in touch with a broker to find out about the options available to you.
A broker will apprise you of the risks and benefits of a guarantor home loan and help you figure out a strategy for removing the guarantor from the loan as soon as possible. In case you decide a guarantor home loan is not right for you, your broker could assist you with other options, such as getting an LMI waiver for some professionals.
