Do you need a home loan guarantor?

26 Jun 2019

In the process of acquiring your dream home, you may find that securing a home loan isn’t a walk in the park. Luckily, there are a number of ways to make taking out a home loan easier—from comparing home loans to find the right one for you, to considering having a home loan guarantor.

If you can’t whip up money to put down on your deposit quickly but you are financially capable of paying off a loan, getting a guarantor could lend you enough security to take out a home loan.

What is a guarantor?
A home loan guarantor is a third party to a home loan. A guarantor can help you secure a loan by offering their personal property, or properties, as security for your loan. In effect, you're using their equity as a deposit for your loan.

After you've built up enough equity in your property (that is, paid off an agreed-upon amount of your loan to satisfy the lender of your own financial security), you can release the guarantor so they are no longer liable for your loan. In the event that you will be unable to keep paying for your home loan and you are forced to sell your property to repay the loan, any outstanding amount will be payable by your guarantor.

Lenders typically only approve immediate family members such as your parents or spouse as home loan guarantors. If you wish to make someone other than your immediate family your guarantor (such as siblings, step-parents, grandparents, aunts or uncles), they must comply with additional criteria to be recognised by your lender.

Typically, lenders will not recognise friends or people who are not immediate family members as guarantors.

To be a guarantor, one must:
Be above 18 but below 65 years old (lenders may not accept retirees as guarantors)
Have more than 20% plus the guarantee amount in equity in their property (meaning they own their home outright or have paid off a good portion of it)  
Maintain a good credit score
Some lenders may also require the guarantor to have a sufficient income to service the loan amount of the guarantee being provided.

If the family member you have in mind fits these criteria, they might be eligible to become your guarantor. Here are some things to consider before you ask them to take out a home loan with you!

You can borrow the property’s purchase price in full - and more!
Far and away the biggest benefit of having a home loan guarantor is the fact that you can buy your property upfront, because you’ll be able to borrow your property’s purchase price in full. Because your guarantor is boosting your security, your lender might even let you borrow up to 105% of the property value to take care of the costs surrounding getting a new home, such as stamp duty, property title transfer fees, and even the essentials.

Get a guarantor if: You want to skip the deposit and acquire your property straightaway. Instead of spending time saving up for a deposit, you can buy the property straight-away and save up to pay your mortgage instead.

You can get discounted interest rates
Aside from no longer needing a deposit, you might even be able to score lower interest rates from a lender you have not been able to access, if you have a home loan guarantor. Having a guarantor lowers your risk for lenders, because they see the guarantor’s property as ample security.

Get a guarantor if: You want to pay back your loan with lower interest over time. Of course, this relies on you making your payments regularly, so your guarantor’s property won’t be forfeited by the lender.

You can skip paying Lenders Mortgage Insurance
Having a home loan guarantor on board lets you avoid paying Lenders Mortgage Insurance (LMI). LMI is risk  insurance that you pay for your lender if you’re taking out a loan and your deposit is worth less than 20% of the property. This provides extra protection to your lender to prevent them incurring a loss on your loan.

As mentioned previously, if you have a guarantor then you can pay the full price of the property upfront instead of making a deposit. This means you won’t be asked to pay LMI anymore.

Get a guarantor if: You’re not keen on paying LMI premiums - which typically adds up to thousands of dollars.

You can pay off minor debts too
A final tiny benefit of taking out a loan with a guarantor: if there’s some money leftover from paying off the property and the associated paperwork, you can use it to take care of your credit card bills and other small debts.  By consolidating your debts you can lower your monthly outgoings.

Get a guarantor if: You like a little leeway in your loans, and if you have other expenses the leftover money could help with.

Are there risks to getting a guarantor?
The risks of getting a home loan with a guarantor are to be clearly understood.  As we mentioned above, if you are unable to keep paying for your home loan, your guarantor may become legally liable to pay back a portion of you loan or continue making payments toward it.

Worst-case scenario, if your guarantor offered their house as security for your loan, there’s a possibility they may have to sell their home in order to pay for your debt.
The problem is, if they don’t have enough cash on hand to cover your debt, they may have to sell their property to pay back a portion of your loan.  Alternatively they may have to apply for a loan themselves or put up another mortgage on their home. Worst-case scenario, if your guarantor offered their house as security for your loan, there’s a possibility they may have to sell their home in order to pay for your debt.

To minimise this risk, ensure that your home loan has a limited guarantee feature. Limiting the guarantee means that if you default on your loan, your guarantor is only legally responsible to pay for your loan up to a certain amount (usually a maximum of 20% of the value of the property you are buying). Your parents or spouse may have to put up a mortgage on their house, but the bank will take only the money that is owed them and not the entire property.

Consider the risk posed to your family member - as well as your personal relationship with them - before you ask them to become your guarantor.

So, do you need one?
There are a number of advantages to getting a home loan guarantor, but also quite a bit of risk to the guarantor should you be unable to pay for your loan.

If you’re not willing to risk your spouse or parents’ assets, you can try other methods of getting financial aid or security from your family. Your parents or spouse can be a co-borrower and owners with you.  They can also simply help you make your deposit on the property.  Also if you can pool enough money to cover a 20% deposit then you can take out a loan without having to pay LMI.

To find out whether a guarantor is right for you, compare your home loan options with Home Loans Australia today, or speak to one of our experts to find a home loan solution that’s right for you.

*Fees, charges, terms and conditions apply.

Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.

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