For first home buyers building up a 20% deposit (to avoid Lenders Mortgage Insurance) can feel like an uphill battle. For a $500,000 property you would need to save $100,000 + costs to avoid LMI. In a previous article I’ve focused on different government schemes that can help you get into a property without a 20% deposit, but another avenue which I’ll touch on in this article is having a guarantor.
What is a guarantor home loan?
A guarantor home loan allows specific individuals (generally family members) to ‘guarantee’ the loan. This essentially means that in the event you can’t repay the loan, the guarantor is responsible for paying the lender back. A guarantor will offer equity, such as a percentage of their home, as part of security for part or all of your mortgage.
The homebuyer will still be responsible for making the regular repayments on the home loan. However, if the homebuyer fails to meet those repayments, the guarantor may be liable to cover them. Like a normal home loan, for a guarantor home loan you would borrow an amount from a bank and repay it, but the guarantor’s equity essentially acts as additional collateral should something go wrong.
Who can act as a guarantor?
Not every lender offers the guarantor structure and those that do, have slightly different structures for how they administer guarantor loans and what they will allow. As briefly mentioned above, lenders generally require the guarantor to be an immediate family member i.e., a parent or partner, but some lenders can allow a sibling or grandparent.
How much can I borrow with a guarantor?
Similar to the above, different lenders have different policies but several will allow you to borrow up to or even above 100% of the value of the property that’s being purchased. How much you can borrow is really dependent on your financial standing and ability to demonstrate servicing. Before applying for a home loan or asking someone to go guarantor for you, it’s important to consider how lenders assess your serviceability i.e. income, expenses, etc. Having a preliminary discussion with a guarantor to confirm they’re willing is always recommended before entering any formal agreement.
How does it work?
The easiest way to demonstrate how a guarantor loan works is an example. Let’s assume you purchase a $700,000 property, have $15,000 in savings and your parents who are happy to go guarantor own their owner occupied property with no debt attached. Below is a summary of the scenario taking into account costs, your deposit, etc.:
As seen from the above, what a lender will do is take 2 loans: Loan 1 is 80% of the purchased property price and is secured against the purchased property. Loan 2 is the remaining shortfall between the 20% deposit + costs when taking into account savings ($721,668 – $15,000 – $560,000). Below is a visual representation of how this occurs:
This is an example of how a guarantor can be an extremely beneficial proposition as you’re able to purchase a $700,000 property with only $15,000 in savings. Important to note that as mentioned, you still need to be able to service a $706,668 total loan amount.
In summary, if you are looking to get your foot into the property market with less than a 20% deposit, then getting help from a guarantor can help you avoid paying lenders mortgage insurance (LMI). If you would like more information to discuss the guarantor process, please reach please contact myself on 0401 225 713 or lmckean@lbkprivatelending.com.au.