A guarantor predominantly helps first home buyers purchase property with a small deposit. But guarantors are not just limited to first home buyers, anyone can use a guarantor. Here’s what you need to know.
What is a guarantor home loan?
A guarantor is someone who provides additional security for a home loan. They will usually be a close family member such as a parent, grandparent or sibling. A guarantor is not required to put any cash towards the property purchase. Instead they use an existing property as a guarantee. Up to 80% of the loan can be secured by the property being purchased and the remaining funds by the guarantor’s property. The guarantor is not required to make any repayments on the home loan.
What property can be used a security?
Any residential property with equity, owned by the guarantor can be used as security. However, we recommend they use an investment property in order to avoid risking the family home should something go wrong.
Do I still need a deposit?
When using a guarantor, a first home buyer may not even need a 10% deposit. In some cases, the guarantee may cover 20% or more of the purchase, meaning no deposit would be required. Other costs such as stamp duty, fees and conveyancing will still need to be paid for.
When is a guarantor no longer needed?
The guarantor can be removed from the home loan once there is 20% equity in the property being purchased.
Are there any risks in becoming a guarantor?
Yes. A guarantor is effectively taking responsibility for the loan if repayments are not being made. This may mean they need to cover home loan repayments. Or if the worst happens and the bank needs to sell the property, any shortfall will have to be paid by the guarantor. This may even result in the guarantor having to sell their own property. If the guarantor wants to sell or refinance during this period, the guarantee can limit their options and make it more difficult.
Example of how a guarantor loan works
Harry and Tom want to buy a home for $600,000. They have a deposit of $60,000 which is equal to 10% of the property value, plus $5,000 set aside for ‘costs’.
As the deposit is less than 20% of the property value, Lenders Mortgage Insurance (LMI) would be payable. Using a guarantor means Harry and Tom can purchase now without paying LMI or having to save another $60,000.
Tom’s parents agree to provide the guarantee for the $60,000 needed for the purchase by using equity in a property they already own.