A Guide to Guarantor Home Loan Requirements
The main issue for many first-time homeowners and investors in the current property market is the ability to save a deposit.
While house prices in Sydney and Melbourne have increased over recent years, interest rates are historic lows which means the ability to afford the mortgage once you’re in the market has improved.
But pulling together a big enough deposit remains a struggle for many would-be property buyers, especially when they have to pay for their living costs, including rent, at the same time.
There are alternatives out there, including guarantor home loans that can help get more prospective buyers into their first property.
What is the structure of guarantor home loan?
Guarantor loans can be a great way for young people to achieve a deposit, but their ins and outs must be understood from the outset.
- A guarantor loan works by someone else (more on that a bit later) providing equity or security in their property to fund part, or the whole, deposit.
- A guarantor loan requirement is sufficient equity in the property offered as security.
- A guarantor doesn’t need to be involved in the loan for its entirely. Instead, it’s advisable that the property owner actually works towards getting the guarantor “released” from the loan, which can be achieved by paying down the mortgage or improving the property via renovations and therefore increasing its value.
- A guarantor is a person or persons who assumes responsibility for paying off the loan if you’re no longer able to meet your financial commitment. Essentially, the guarantor takes financial responsibility for servicing the home loan in the event that you default on your repayments. Even if the guarantee is only for 20 per cent of the entire loan, the guarantor will be wholly and severally responsible for the loan, but doesn’t have ownership rights to the property.
An example of how a guarantor loan can work is:
John and Jill want to buy a $450,000 home but have struggled to save a big enough deposit. In fact, they have only managed to save enough to pay the stamp duty and associated costs. As newly-weds, they approach John’s parents who have paid off their own home, who then agree to use $90,000 of their own equity to finance the couple’s 20 per cent deposit.
Who can be a guarantor?
The main consideration with guarantor home loans is that they must be provided by someone who has a strong relationship with the buyer or buyers, which generally means immediate family members such as:
- De facto partners.
There are a number of considerations or guarantor home loan requirements that the lender will take into account. These include:
- Their age
- Whether their property is in Australia
- If they have sufficient equity
- Whether they are currently employed
A guarantor also needs to be of sound mind and will need to seek both legal and financial advice before making the decision to act as a mortgage guarantor.
How much can you borrow?
While there are some lenders that still offer home loans with a loan to value ratio (LVR) of 95 per cent, they are not nearly as common as they were before the GFC.
The vast majority of borrowers, and especially investors, are only able to access up to 80 per cent of the purchase price via a home or investment loan.
As mentioned above, that is where it becomes tricky for prospective property buyers, because it is very difficult to save a 20 per cent deposit, plus costs.
By using a guarantor home loan, however, lenders are generally more flexible with their lending criteria, which means that prospective property buyers can potentially access loans with LVRs in the 90 per cent range.
Intuitive Finance – the smart choice
First-time property buyers have used financial help from their families to get into the property market for decades.
Today, as well as cash gifts, family members can offer up part of their own homes as security to help their loved ones achieve their property dreams.
The world of banking and finance can be a pretty daunting one for both novice and sophisticated investors and since our establishment in 2002 we’ve focused on providing outstanding service and business standards.
This approach was vindicated when we were named Victoria’s favourite mortgage broker at the 2015 Investors Choice Awards.
So, if you’re considering asking someone in your family if they’re prepared to be a guarantor for your home loan, why now contact Intuitive Finance today to ensure you have the right information and expert support on your side?
Discuss your specific needs & formulate the right strategy for you. Get in touch to organise your complimentary 60min session today!
The information provided in this article is general in nature and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information you should consider the appropriateness of the information with regard to your objectives, financial situation and needs.