Understanding the home loan guarantor process

Saving for a home deposit while you pay rent isn’t easy. It’s not that you can’t afford to pay a home loan – when you consider how much you’re paying for rent, a car loan and your credit card debt, paying a mortgage would be cheaper. All you need is a foot in the door.

The good news is there’s a way to get into the property market that doesn’t involve years of saving for a deposit. Now that no deposit home loans are off the market, a guarantor home loan can be the solution you’re looking for to buying a home without a deposit.

What is a guarantor home loan?

As part of a guarantor home loan, someone close to you, usually your parent, provides a guarantee for your home loan. Your home loan is secured using the equity in their property.

Who can be a guarantor?

Most banks require your guarantor to be your parent, although other close family members such as grandparents or siblings can be considered on a case-by-case basis. A guarantor must either own their own home, or have enough equity in their property to provide security for your loan.

Why would you need a guarantor home loan?

Most guarantor home loans are for first home buyers who need some help to enter the property market. Sometimes first home buyers find it difficult to save a deposit because of other expenses such as rent, personal loans and credit cards. If buying a particular property means moving quickly on the financing, a guarantor loan can be the answer.

How does it work?

The guarantor loan is secured both by the property that you are buying and the property owned by the guarantor.

Case study: Sarah and Mark

Sarah and Mark want to buy their first home, but they don’t have a deposit. A small house comes up for sale in their favourite suburb that looks like the perfect buy for them and their small family. It's a bargain at $250,000. They ask Sarah’s parents if they will ‘go guarantor’ for them. Sarah’s parents agree and they go to the bank together.

The bank assesses Mark and Sarah’s income, the value of the house they want to buy, and how much Sarah’s parents owe on their own mortgage. Sarah’s parents have 50% equity in a house that is worth $600,000 – this means they have paid off $300,000 of their mortgage.

Sarah and Mark pay their mortgage payments regularly, plus house prices rise in their area, increasing their equity. In three years, Mark and Sarah have more than 20% equity in their property and arrange for the guarantor to be released from the mortgage.

Case study: Lee and Lyndal

Lee and Lyndal have saved up to buy their first home. When they find an apartment in their price range at $750,000, they’re excited to make an offer. They have steady incomes, the repayments fit their budget, and they think their 15% deposit will make the bank happy.

As first timers, they didn't consider the other expenses in getting a mortgage, like Lender’s Mortgage Insurance (LMI). Because they have less than a 20% deposit, they’re liable to pay thousands more for LMI.

Lee’s parents own their own home outright and offer to be guarantors on the loan. They approach the bank together. The bank grants a guarantor loan to Lee and Lyndal, using Lee’s parent’s home as security. Having a guarantor on their loan means they don’t need to pay LMI, saving them thousands of dollars.

What are the positives?

  • A guarantor home loan helps get your foot in the door of the property market.
  • You don’t need to save for a deposit.
  • You can take advantage of a great property buy when it comes up.
  • You can avoid Lender’s Mortgage Insurance (LMI). LMI is compulsory for loans that cover more than 80% of the property value, and can cost thousands of dollars.
  • A guarantor loan covers stamp duty and other purchase costs.
  • You can borrow 105% - 110% of the property value, which means that you can consolidate debts or use it to refinance.
  • You can ask for a limited guarantee, which limits the liability of the guarantor.

What are the risks?

  • Your guarantor is liable for a defaulted home loan. If you don’t pay your home loan, their house can be at risk – although selling the guarantor’s home to clear the loan would be the very last option.
  • It can be complicated to combine family and money. Make sure everyone has professional legal and financial advice before they agree.

What is a limited guarantee?

A limited guarantee limits the liability of the guarantor to a portion of the loan rather than being responsible for the entire amount. There’s a complicated formula to figure out the limited amount, but it ends up being around 20% of the property value. Use our handy home loan calculator to figure out how much your guarantor will be liable for.

What types of guarantor home loans are there?

  • Equity or security guarantee: The guarantor uses real estate they own as security for your loan. This type of guarantee is most often used when first home buyers have a good income but no saved deposit.
  • Security and income guarantee: A security and income guarantor is usually a parent helping their child with a low income to buy their first property. The lender uses the parents’ property as security and the parents’ income to prove that the loan is affordable.
  • Family/parent guarantee: This is when the guarantor is directly related to the borrowers.
  • Limited guarantee: The guarantor is only liable for part of the loan.

Let’s talk

A guarantor home loan may be the perfect solution to your home loan problem. Contact QBANK or call us on 13 77 28.

 

Posted in

First Home Buyer

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