A Guarantor Loan helps you get into your own home sooner.
In my years of helping families buy their first homes one of the biggest barriers I’ve seen people face is saving the deposit. They may be earning a good income, but paying rent prevents them from saving. For many of my clients once they’re in a home loan they are actually paying less in mortgage repayments per month than what they were paying in rent! The issue is trying to get them in that home loan in the first place.
We know there are many families who can service a home loan, but that they just can’t get the deposit together and that’s where a Guarantor Loan (family pledge) can be a viable option. Check out our post on Home Loan Deposits to find out how much deposit you really need.
What is a Guarantor Loan?
A Guarantor Loan is when someone, usually a close relative such as a parent, uses the equity in their property to help you secure yours. It can help you buy a home to live in or a residential investment property.
Having a guarantor on your loan often means that you won’t need a deposit at all. Guarantor Loans may also help you to avoid paying Lenders Mortgage Insurance.
There are two types of Guarantor Loans: security guarantees and service guarantees.
A Security Guarantee is sometimes also known as a ‘family pledge’.
It is the most common type of Guarantor Loan. If you have a very small deposit or no deposit at all, a relative uses the equity in their home to guarantee the deposit on your home for you.
Here’s an example of how a security guarantee would work. You have no deposit but want to buy a home for $500,000. You (the borrower) would take on the debt of 80 percent of the value of the home loan, ($400,000), in your name. The 20% balance of the loan, ($100,000), is then guaranteed in the name of your guarantor and in your name (the borrower). The Security Guarantee will help you avoid paying Lenders Mortgage Insurance (by borrowing 80% or less of the value of the property).
Be aware that there are some risks involved for the Guarantor. The Guarantor’s property could be placed at risk; they need to be very sure that you (the borrower) can pay back the loan. It may also reduce the Guarantor’s ability to borrow money.
It’s important for your guarantor to understand the risks involved in guaranteeing your loan and that they are in a strong enough financial position. It’s smart to speak to a professional before applying for this type of loan.
Service guarantees are less common than security guarantees. It involves the Guarantor guaranteeing all the repayments on a loan. The Guarantor will also be named on the property title.
A service guarantee loan could also mean that you may not be entitled to any government grants so should be considered very carefully.
A Guarantor Loan can help you buy your first home or investment property sooner. It can help you enter the property market with little or no deposit. But there are some risks associated with them. Therefore, it’s important to seek professional advice before taking out this type of loan. All parties should understand the implications of a Guarantor Loan.
If you’d like to find out whether a Guarantor Home Loan is the right option for you, or if you’d like help setting up a Guarantor Loan, please give me a call or send me an email, I’d love to help you.