What is the role of a guarantor in a mortgage?
If you're renting and trying to save up a deposit for a home, you probably know how tough it can be. But don't worry, I've got some good news for you! There's a solution that could help you get over the line faster - it's called having a 'guarantor'. Sounds fancy, right? But it's actually pretty straightforward. A guarantor is someone who can vouch for you and provide support in your home buying journey. They can make it easier for you to get into your own home sooner. So, why not check out this quick video to learn more about what a guarantor is and how they can help you achieve your dream of owning a home?
- When you take out a mortgage, you may need a guarantor to provide extra security for your home loan. Usually, lenders prefer the guarantor to be a close relative, like a parent, grandparent, or sibling.
- Don't worry, though - your guarantor won't need to provide any cash payment upfront. The guarantee is simply a promise to the lender that they'll be responsible for some of the debt if you're unable to make payments.
- Some lenders might even let extended family members or ex-spouses be a guarantor for your loan, but this can vary depending on the lender.
- If you're lucky enough to have a guarantor, they agree to offer a portion of their home equity to top up your cash deposit. This way, a guarantor home loan can help first-time buyers purchase their own home much earlier than they might otherwise be able to.
Understanding how a guarantor home loan works
Buying your first home can be a daunting task, and one of the biggest hurdles can be saving up for a deposit. But fear not, because there is a way to get into the market sooner - a guarantor home loan.
With this type of loan, you might only need a small deposit or even no deposit at all! That's because a guarantor, who is usually a family member, offers equity in their own home as additional security for your loan. Pretty cool, right?
Another great thing about a guarantor home loan is that it can help you avoid the cost of lenders mortgage insurance (LMI), which can save you thousands of dollars. So, if you're eager to get started on your home-buying journey but are struggling to save up for a deposit, why not consider a guarantor home loan? It could be just what you need to make your dream of homeownership a reality.
Example
Let's imagine you've set your sights on a $500,000 property, and you've managed to save up a $50,000 deposit - that's 10% of the property's value. However, the lender will ask you to pay lenders mortgage insurance (LMI) unless you have a deposit of at least 20%, or $100,000 in this example.
Rather than waiting to save up an additional $50,000, a guarantor home loan could be the answer you're looking for. With a guarantor offering $50,000 of their own home equity as extra security for your loan, you'll have the 20% security required to purchase the property today without paying LMI. That's a huge saving!
It's important to note that the guarantor won't need to make any payments on your loan. However, if you find yourself unable to keep up with your repayments, the lender will turn to the guarantor to make the repayments. But don't worry, with this extra security, it's possible to get a home loan even when you only have a small deposit.
What you need to know about guarantor home loan requirements
If you're interested in a guarantor home loan, there are some requirements you should know about. First and foremost, you'll need a family member who is willing to be your guarantor. It's important to note that the guarantor must also own their own home, as the equity they have in their property will be used as security for your loan.
Being a guarantor is a big commitment, so it's crucial that the guarantor fully understands their obligations. In the event that you cannot make your loan repayments, the lender will turn to the guarantor to make the payments. This is why it's strongly recommended that anyone considering becoming a guarantor seeks independent legal and financial advice before committing to the role. In fact, most lenders will require the guarantor to do so before agreeing to the guarantee.
Can a guarantor home loan help your application?
If you're struggling to save enough money for a home deposit, but have the income to make the mortgage payments, a guarantor might be able to help you secure the funds you need to buy a house.
Saving for a deposit can be difficult, especially when you're also renting. By having a guarantor, you may be able to borrow the full purchase price, and in some cases, the associated costs of buying property. Keep in mind that some lenders may still require you to contribute some of your own equity towards the purchase, even if you have a guarantor.
Another advantage of having a guarantor is that it could help you avoid paying Lenders Mortgage Insurance (LMI), which can save you thousands of dollars. LMI is usually required for home loans where you have less than a 20% deposit, as it covers the lender against the risk of high Loan to Value Ratio (LVR) lending. Although this insurance covers the lender, you are the one who pays the premium.
The amount of the guarantee provided by a guarantor will depend on the specific policies of the lender. The guarantee can range from the full loan amount to as little as 20% of the loan (where the loan is for 100% of the purchase price).
Once you've built up some equity in your property, your guarantor can request to be released from the loan. The time it takes to achieve this varies depending on the size of your original deposit, the number of extra repayments you've made, and whether your property has appreciated in value.
Keep in mind that depending on the lender, there may be additional fees involved in releasing your guarantor. This could include a fee for the lender to revalue the primary security property, as well as lender discharge fees.
It's important to remember that having a guarantor is a big responsibility, and the guarantor needs to be a family member who is also a homeowner. If you are considering having a guarantor, it's a good idea to seek independent legal and financial advice before proceeding. Most lenders will insist on this prior to accepting a guarantee.
Example: How a Guarantor Can Help You Avoid LMI
Let's suppose you're eyeing a $400,000 property and need to borrow $380,000, resulting in a 95% Loan-to-Value Ratio (LVR). Unfortunately, this also means you'll need to fork out for Lenders Mortgage Insurance (LMI). However, if you have a family member willing to provide a guarantee for your home loan, utilising their home equity as additional security, the LVR would decrease, and you'd avoid paying LMI altogether. This could save you roughly $11,600, which is a significant chunk of change.
How a guarantor can help you buy a home
If you're dreaming of owning a home but struggling to save up for a 20% deposit, a guarantor might be able to help you out. By using the equity in a family member's property as extra security for your loan, you could potentially avoid paying lenders mortgage insurance (LMI).
Our informative video will guide you through the process of securing a guarantor and how they can help you achieve your dream of homeownership. From understanding the eligibility requirements to exploring the benefits, we've got you covered. Watch now to learn more!
