Guarantor home loans are popular with borrowers looking to get into the housing market who have very little to no savings. They may also be useful for borrowers who have saved a deposit but have less than 20% and are looking to avoid paying lenders mortgage insurance.
There are a number of reasons why many first home buyers may look to use a guarantor when buying their first home.
Borrowing with a Guarantor allows you to borrow up to 105% of the purchase price. This translates to 100% to purchase the property and the additional 5% will help to cover the stamp duty and other costs associated with the purchase.
Using a Guarantor involves having a relative, usually your parents, putting their property up as security against your loan.
If you’re unable to repay your loan bad, the bank has the opportunity to recover the amount they are owed from your guarantor. This may mean refinancing the debt into the guarantors loan or a worst case scenario of forcing the guarantor to sell their property.
Most lenders will encourage guarantors to take legal advice before entering into the guarantee as there are risks and it’s important they understand them. When setting up a loan we look to use a limited guarantee and structuring it in a way to best protect the guarantors.]
The key benefits of using a Guarantor is that it allows you to borrow with low or no deposit at all. Many lenders will not require you to have any of your own savings when using a Guarantor.
This also means that it may allow you to purchase a higher priced property than what your savings allow.
Just because you can borrow 100% it does not mean that you have to.
You can still borrow 90% of the property purchase price, if you have saved enough money to cover the 10% costs and the stamp duty. This would allow you to save on Lenders Mortgage Insurance (LMI). Given that LMI would not be involved, it may also allow you to get a better interest rate.
It is important to note that Guarantee’s can be removed in the future depending on circumstances, including how your properties values change and how much of the loan you have paid off.
If you would like to discuss if using a Guarantor to purchase your home is right for you, please get in touch with us about our obligation free mortgage broker service.