Guarantor Home Loans Explained for First Home Buyers
With interest rates at all-time lows, you may now be considering whether or not you can afford to buy your own home. Taking out your first home loan is a big financial step and one that generally involves a lot of research, hope and (let’s be honest) mild anxiety. Not to mention all the “helpful” advice you’ll likely receive from well-meaning friends, colleagues and random strangers. Mixed in with these well-intentioned suggestions you’ve probably heard the term “guarantor loan”. But what is a guarantor home loan? And how does a guarantor mortgage work to help you get your first home loan?
What exactly is a guarantor?
Generally, a lender will require that you provide some sort of deposit when applying for a loan. For those who may only have a small deposit (or none at all), a guarantor can step in to help.
The guarantor offers some of the equity in their own property as a guarantee that the borrower will be able to make their mortgage repayments.
This effectively provides the borrower with their deposit while also reassuring the lender that, one way or another, the mortgage will be paid for. If the borrower can’t make their repayments, then the guarantor becomes legally responsible for paying the loan.
Who can I use as a guarantor on my mortgage?
The limits on who you can use as a guarantor will vary depending on the lender, but most will allow for immediate family members to take on this role (such as your spouse or your parents).
Some lenders broaden this definition to include extended family, which means that you could potentially use your in-laws, grandparents, siblings or even an obliging ex-spouse.
The one thing all lenders will require is that the guarantor be a home-owner with sufficient equity (the value of the property minus the balance of any existing mortgage).
How does a guarantor mortgage work to help me get my first home loan?
Currently, the majority of lenders will require a deposit of at least 5% of the property value, and this increases to 20% if you want to avoid paying thousands of dollars extra for Lenders’ Mortgage Insurance.
That means you’ll need to save anywhere from $25,000 up to $100,000 for a deposit on a $500,000 home! As a result, many first home buyers find themselves in a position where they could comfortably be making mortgage repayments, but the deposit requirements are what is holding them back.
With a guarantor, you won’t have to waste years trying to save for that deposit. Instead, you can move forward with turning your first home buyers dream into a reality.
And bringing a guarantor on board doesn’t mean that you’ll have to accept a higher interest rate – there are plenty of lenders who will offer a guarantor loan with interest rates that are comparable to those found on a standard mortgage.