With today’s housing prices being so high, many people are struggling to get a foot in the property market.
They can afford to repay a home loan, have a good credit history – they just need the deposit!
It isn’t easy saving the required upfront cash to break into the property market. This is a stumbling block for many young couples.
But don’t stress, there are options still available. A guarantor home loan could help you!
What Is A Guarantor Home Loan?
These types of loans can help you purchase property without having to pay a deposit. Some lenders will also allow you to finance the associated costs, like stamp duty. To top it off, it may also be possible to avoid paying Lender’s Mortgage Insurance (LMI).
The way this works is the guarantor (usually Mum and Dad) put up their property as additional security on your loan, reducing or even eliminating the need for a cash deposit. This guarantee can be limited to the amount required.
Ideally, over time, two things may happen. First, you may pay down the loan balance. Second, your property may go up in value. When this happens, it may be possible to release the guarantor’s security property.
What Makes My Parents Eligible?
Firstly, mum and dad need to have enough equity available in their property.
Lenders, understandably, also generally want to make sure that if they do need to call on the guarantor’s security, they won’t be leaving them without a place to live. So if it is an investment property the guarantors are offering as security that is ideal. If it is their principal place of residence and they are no longer working, there would need to be a strong case that they could cover the guarantee in another way.
Guarantor policies vary greatly between lenders. However, one lender who is a leader in this space, limits the amount of the security guarantee to 27% of the purchase price (enough to cover the 20% deposit plus costs). Further, the amount of the guarantee, plus any existing loan balance, cannot exceed 50% of the value of the guarantor’s property.
There is a lot to consider with this type of loan, so it’s always best to speak with a qualified Mortgage Broker to see if it’s right for you.
How Much Will I Be Allowed To Borrow?
You can usually borrow up to 105% of the property purchase price, allowing you to also borrow stamp duty and associated loan costs.
Some lenders will even allow you to consolidate some personal debt as well. This is a good option if you want to get rid of a personal loan or credit card, improving your cash flow.
Is A Guarantor Home Loan Risky?
Ultimately the guarantor is offering their property up as additional security. And this carries risk.
That said, if you fail to meet your home loan repayments, the bank’s first preference is to work with you to get things back on track. Only as a last resort do banks look to the security.
Where the bank needs to call on security to cover the debt, they will first look to sell the borrower’s property. If this is sufficient to repay the debt, then the guarantor has nothing to worry about.
If this is still not enough – for instance if the property has dropped in value – the guarantor would be liable to ensure the remaining debt is paid.
Ideally the guarantor would be able to cover the outstanding debt in other ways. But if this is not possible, then the bank would look to sell the guarantor’s property.
When Can The Guarantee Be Removed?
This depends on a number of things, however, generally, if the Loan to Value Ratio (LVR) can be reduced to less than 80%, you can seek to have the guarantor’s security released.
Getting to this point usually takes at least a few years. But doing the following can help speed things up:
- Making extra repayments on the guarantor home loan
- Buying in an area that is expected to experience good capital growth
If you have a solid plan in place you can look at refinancing and releasing the guarantee as quickly as possible.
Should The Guarantor Obtain Legal Advice?
Some lenders require that guarantors obtain legal and/or financial advice before making such a commitment. Other lenders do not require this, however they still highly recommend it.
Whatever the case, it’s always good to get proper advice, allowing you to make an informed decision.
Being a guarantor is a significant commitment, but can be great way to help your kids get into the property market. Make sure you weigh up the risks associated with offering this kind of support and importantly ensure you are comfortable with the person who will be borrowing.