We realise that a lot of our clients (obviously) not first home buyers. So, a lot of the frenzy surrounding the current building grants may not always be relevant. Although, if you haven’t seen the latest announcement from the WA government – you should definitely go and check it out to see if it’s something that may interest you (who isn’t interest in $20K??), as you don’t have to be a first home buyer to be eligible.
HOWEVER, something that always needs more air time is guarantor loans – what are they, how they work, and how they can be useful for you and your family. We frequently come across people who have never heard of a guarantor loan, and when they do, are not sure how to broach the subject with their parents or relatives. Similarly, potential guarantors are not across the details of what’s involved and how it all works.
Guarantor loans have become very popular in recent years as they cost less than standard home loans, they allow you to buy without a deposit and some lenders now allow you to limit the size of the guarantee.
Let’s start with a basic overview before you determine if this is something that may be of interest to you and your family.
What is a guarantor loan?
A guarantor home loan allows parents, or relatives, to use the equity in their property as security for part or all of your mortgage. They could also ‘go guarantor’ by contributing cash to help you pay off the loan.
How does it work?
Your guarantor will provide a guarantee for your home loan which is secured on their property. In most cases, this is your parents assisting you to buy a home.
All of the lenders treat guarantor loans slightly differently, so speak to us if it’s something you’re interested in pursuing and we can determine the most suitable lender for your situation.
What are the risks to a Guarantor?
Typically, as the homebuyer you’ll still be the main person responsible for making the regular repayments on your mortgage (including any interest and fees), but if you fail to meet those repayments, the guarantor may become liable to cover them.
To do this, they will want to work out why you’re having trouble managing your repayments and whether a solution can be found.
Technically, the banks could take possession of the Guarantors property IF ALL OTHER AVENUES TO A RESOLUTION were exhausted. Realistically, it would rarely happen and is in the banks best interest to seek any and all other solutions first and work with all parties involved to keep you as a customer.
Your guarantor may choose to only guarantee a portion of the loan, which would mean once you had repaid that portion of the loan, they would be free from any risk to their property should you miss any repayments further down the track.
Why would I need a guarantor?
To get into the property market sooner, if you don’t have enough deposit of your own to satisfy the lenders.
Once you have paid off part of your loan or your property has increased in value, then you can apply to remove the guarantee.
How is a guarantor loan structured?
A guarantor is the only loan type that allows you to borrow 100% of the property price even if you haven’t saved a deposit.
In a guarantor loan, the lenders use both the property you’re buying and the guarantor’s property as security for the loan.
The guarantor can also choose to limit the guarantee, which means they can only secure a part of the loan.
The banks assume that the value of the guarantee reduces your loan to under 80% of the property value. This is why the requirement to pay Lenders Mortgage Insurance (LMI) is waived by the lenders.
What if I’m a second homebuyer?
Not all lenders will allow guarantor loans in the case that you’re not a first homebuyer HOWEVER some do, understanding that life happens (divorce, illness, etc.)
Will I still need proof of savings?
Again, some lenders will require you to show at least 5% genuine savings, some won’t.
Want to know more, get in touch for a chat today to see if a guarantor loan is a good fit for your situation.