We’ve all read or heard the news that man, is it hard to save even a 5% deposit for your first home!
Political parties are reaching out to assist first-home buyers, including not making them pay Lender’s Mortgage Insurance (LMI) – that less than 20% deposit necessity.
But now that the Reserve Bank of Australia (RBA) is pushing up the cash rate, finding your dream house at a perfect price has become more challenging.
Read on to find out more.
What are guarantor home loans and how do they work?
As the name suggests, guarantor home loans are all about giving a lender a firm guarantee that you are a worthy loan-er.
Your guarantor is a close family member such as a parent or sibling (although some lenders will allow for a friend or colleague) and their house.
Or, more specifically, the lender’s guarantee is a parent or sibling’s equity in their home.
This equity is the security a lender will usually ask from you – the borrower – and as it must cover 20% or more of your new house, you don’t need to pay LMI.
As a result, this means you don’t need a deposit to buy a home.
Not bad, right?
How do I begin a guarantor home loan?
Firstly, consider who best can be your guarantor – and by this, we mean a family member who has the financial means and business savvy to be your monetary back-up in the long-term.
You may not be super BFF close to your guarantor but in the end, this may work in both people’s favour.
After all, a guarantor home loan is a binding business contract and transaction before anything else – and you know what they say about mixing business with pleasure!
Secondly, sit down with your preferred guarantor and discuss your situation with them.
Don’t be surprised if they immediately say no or express concern and uncertainty – and if they do, don’t push them to say yes.
Remember your guarantor is putting everything they own – virtually literally – on the line just for you, and for at least the two-three years of the loan’s length, if not more.
Lots of things can go pear-shaped during this time.
So, give them as much information about yourself, your finances, and guarantor loans in general, as you can, plus details on who they can go to for expert legal advice.
What do my guarantor and I need to obtain a loan?
Once your guarantor has given you the green light, the fun really begins.
For starters, you’ll both want to bear in mind that these loans look risky to lenders.
As a result, they’ll come down harder on both of you – and be less inclined to say yes – than if you were merely applying for your average first home loan.
Guarantors, you’ll need to show proof of the following:
- Very good property equity and assets
- Ability to repay the borrower’s loan if need be
Borrowers, here’s what you’ll need to show lenders:
- Stable employment and income
- Excellent credit rating and history
- Ability to pay your entire loan on current income
Benefits and disadvantages of guarantor home loans
We don’t wish to burst your guarantor loan bubble, especially if you’ve made it this far, but a loan like this comes with a lot of risks – and benefits too.
Stay with us while we look at them.
Guarantor home loan considerations
- You’re responsible for your own home’s financial needs as well as that of your guarantee’s
- As such, you may be required to repay your guarantee’s entire loan including all fees and charges, and you stand the risk of losing your own property
- Until the loan is fully paid, you may not be able to borrow against your assets (depending on your lender)
- As well, you may be unable to get a new home loan
- Your friendship with your guarantee can be damaged or affected, especially if details go pear-shaped (ie they’re unable to repay the loan long-term)
- Bottom line: you can buy a home sooner
- You won’t have to pay LMI
- There’s added financial security from your guarantor, which could help you secure extra funds for your new home
How long does a guarantor stay on a mortgage?
Your guarantor is legally part of your real estate plans until you’ve repaid your loan or until your property has increased in value to the stage that the Loan to Value Ratio (LVR) is at least 80%.
Think of it like this: the quicker you pay off your loan, the quicker you can be full-on friends with your guarantor, rather than meeting and talking with them solely about your home loan.
We recommend though that you continue to buy them coffees, to say nothing of wine and dinners, for a very long time to come!
As a guarantee/borrower, it’s your responsibility to always make loan repayments on time and have the entire loan paid off ASAP.
On this note: aim to keep the relationship and business transactions between yourself and your guarantor cool, calm and collected.
Don’t allow friendship and loans to interfere with one another if at all possible.
If financial details start to look pear-shaped in any way – such as the chance of losing your job – head straight to your guarantor’s front door and discuss the situation with them.
Ideally, have plans set up for just such a situation before signing off on your guarantor loan.
We’re here to help
Even if you’re BFF with your guarantor, it’s often best to talk to someone objective about your home loan.
This is where your friendly Lending Loop team can help because guess what?
You can vent, worry and cry with us, and all for free!
Not much in the world of home buying and selling is easy, but this is – and so is the help and advice we can give you from more than 40 of Australia’s biggest banks and specialist lenders.
So give us a call to discuss today at Lending Loop.
We’ve always got your property back.