Guarantor Home Loan
When it comes to home loans, some borrowers may struggle to secure one for their chosen property due to limited savings or insufficient deposit. This is where a home loan guarantor can be beneficial in helping folks get approved for a mortgage.
Let’s talk about what the guarantor home loan process is all about, how they can assist in helping you buy a home sooner, and what the implications are for both the borrower and the guarantor if you decide to be one or the other in a home loan application.
What is a guarantor?
A guarantor is a person who provides financial security for the home loan that another borrower applies for. It’s a significant responsibility because the guarantor will shoulder the guaranteed amount if the borrower cannot meet the mortgage repayments in the future. The guarantor could be a parent, grandparent, sibling, or another relative who can present equity on their property to use as a security guarantee for your home loan.
There’s no money exchange between the guarantor, the borrower, and the lender. The guarantor’s security doesn’t cover the entire loan amount, only a fraction. It will be helpful for you is the security guarantee reduces your loan-to-value ratio to 80% of the loan because you won’t have to pay thousands of dollars for Lenders Mortgage Insurance (LMI).
Upon agreeing to be a guarantor, they will accept that the lender may get the equity they pledged should there be problems with the home loan repayments.
As the borrower, you will still be responsible for making repayments regularly, but you’ll be in a better position to pay off the loan sooner, with the LMI no longer being required.
How does a guarantor home loan work?
The main purpose of your guarantor is to use their own property or assets as collateral to provide a personal guarantee to support the borrower’s application.
For example, you are looking to purchase a property costing $400,000. You already have a deposit of $40,000, which is only 10% of the home’s value. With this deposit, your lender will require you to pay lenders mortgage insurance, which could add thousands as an upfront premium or added to the overall loan.
So instead of waiting to save at least 20% of the loan, your parents, other relatives, or an unrelated party altogether could agree to be a guarantor. Your parents could offer, say, $50,000 of the equity in their house as extra security for the loan, and reach the 20% deposit amount that you need to waive the LMI.
The guarantor isn’t immediately required to pay, but if the borrower is unable to shoulder the monthly repayments, only then will the lender obligate the guarantor for the mortgage.
What is the benefit for home buyers?
The big advantage for home buyers is the extra security that a guarantor presents to the lender. With a guarantor, the borrower can:
- Access a home loan with a smaller deposit
- Secure the loan with more favorable interest rates and terms due to lower loan-to-value ratio (LVR)
- Improve one’s borrowing capacity and increase the chances of loan approval
- Get a home loan without paying for LMI
Having a guarantor won’t automatically secure the home loan, as your lender will still verify your capability to manage monthly repayments on your own. Having a family guarantor only lessens the risk for lenders as they can contact the guarantor in case there are problems with the mortgage repayments in the future. And being vouched for by a guarantor can help you secure the home loan you need right now.
Who can act as a guarantor for a home loan?
To be eligible, you need to have a family member willing to act as a guarantor, and who can meet the specific criteria. It’s usually parents and immediate family who agree to guarantee home loans, but some lenders approve extended family to be a guarantor to a loan.
As for requirements, the guarantor must be a homeowner – their home equity forms part of the security in your home loan. The guarantor’s financial stability, creditworthiness, and ownership of assets will also be reviewed.
Will a guarantor home loan cost more?
Lenders now offer guarantor home loans in various names, such as “family guarantee loans”. Guarantor home loans typically have the same rate as a standard home loan, the only caveat being that a guarantor vouches for the borrower via their own home equity.
Getting legal advice before agreeing to a guarantor home loan is best. Entering into this agreement is a serious decision that may or may not be suitable for your needs.
Remember, having a guarantor means having a family member involved in the mortgage. Not being able to pay back the loan could affect this relationship. Interest rates may change, but the guarantor agreement remains in place regardless of rate movements. So make sure the guarantor, borrower, and lender agree to the guarantor home loan before making any final decision.
What is the risk for the guarantor?
In extreme cases, where the borrower is unable to pay, and the guarantor is also remiss on repayments, the lender has the right to repossess the guarantor’s home or car to recover the agreed upon guarantee amount. Any bad record will reflect on the guarantor’s credit record, which could prevent them from getting a loan in the future.
To avoid family conflicts, all parties should ensure that a guarantor home loan arrangement for the home loan is the best move for everyone involved, and that independent legal advice has been obtained before taking out the loan
Talk to our Intellichoice mortgage brokers to further discuss how to get a family guarantor for your home loan. We will help you by encouraging open and honest communication between you as a borrower and your potential guarantor. From mortgage implications, risks, and expectations involved – we’ll hold your hand along the way.
