Buying Property With a Guarantor Home Loan
Saving a 20% home loan deposit is a lot more difficult now than it ever has been. In the 1980’s, a home loan deposit was worth about the average annual income. Now, in 2016, a 20% home loan deposit is 4 times the average annual income - taking not 1 year, but up to 5 years for a couple to save. If you’re on your own it’s even harder.
What is a Guarantor Home Loan?
A Guarantor home loan is when you take out a mortgage with a lender, with the help of a family member who pledges a part of their property as additional security for your mortgage.
This means that you do not need to have a large deposit ready. It also enables you to avoid paying Lender's Mortgage Insurance, which you would pay in you had a smaller deposit.
The guarantor is not responsible for any of the repayments on the home loan. To use a guarantor you must be able to service the loan - making every repayment on time - with your own income.
How Does a Guarantee Work?
When you have a guarantee attached to your mortgage it means that the person who has elected to be your guarantor signs a document with your lender creating a mortgage over their property. In this way, the guarantor allows equity in their property to be used as additional security for your loan. You should note that the property you are purchasing forms the primary security for your home loan.
The amount of the guarantor mortgage can range from anything around 20% of the purchase price of the new property - equivalent to a home deposit - to the full loan amount. It depends on the individual lender’s policy.
You can arrange to release the guarantor from the mortgage over their property that is attached to your home loan once you have made repayments on your home loan over a period of time and you have built up equity in the home to above 20%, depending on the exact terms of your mortgage contract.
There is usually a fee to release your guarantor, but it will be a lot less than if you had paid Lender’s Mortgage Insurance. The fee covers a re-evaluation of your property - the primary security for your home loan - and discharge fees charged by the lender to release the guarantor.
A guarantor home loan can be used to purchase an owner-occupied established home, for an investment property or to build a home.
Who Can Be Guarantor?
Your guarantor will need to be an immediate family member - usually this means a parent. Sometimes lenders will allow a sibling, grandparents, or extended family members, even ex-spouses - to guarantee a loan. It depends on the lender’s policies and the nature of the family relationship.
It’s essential that the guarantor and the borrower both understand exactly what is promised by the guarantee.
What happens if the borrower can’t make the mortgage repayments?
If you can’t meet the repayments as outlined in your mortgage contract, the lender can take legal action against you, and in some circumstances, against your guarantor. Your guarantor is liable for the amount of money stated in the guarantee.
When you apply for a home loan using a guarantor it’s essential that your guarantor seeks independent legal and financial advice before agreeing to the guarantee. Most lenders make this a requirement of the home loan.
Because a guarantee means that some of the equity in the guarantor’s home are tied to the mortgage of the borrower they are helping, the borrowing power of the guarantor is reduced whilst the guarantee is in place.
How Does Having a Guarantor help your Home Loan Application?
If you can easily meet monthly mortgage repayments with your income, but you’re paying rent and it’s really hard to save up a deposit, then having a guarantor means that you might be able to borrow up to the full purchase price of the home.
You’ll be able to buy your own home sooner with a Guarantor.
It’s best if you can save up an amount of money for the purchasing costs and for the costs of owning a home, but with a guarantor and if you have a good income and savings history, you may be able to borrow this amount as part of your mortgage.
However, having the borrowing costs and a small deposit ready to go will give you a wider choice of home loans and lenders, and may allow you to access lower interest rates and better home loan features.
Saving a deposit and costs, even a small deposit, proves to the lender that you are disciplined with your finances and increases their confidence that you have a strong saving history and will be able to meet future repayments should interest rates go up or down
Lender’s Mortgage Insurance and your Loan to Value Ratio (LVR)
If you take out a mortgage by yourself, without a guarantor, and your deposit is less than 20% of the property purchase price, you will pay Lender’s Mortgage Insurance(LMI) as either an upfront fee or as part of your total loan amount.
Lender's mortgage insurance (LMI) is a premium which protects the lender in the event that you default on the loan, and the sale of your property doesn’t cover the full loan amount. The amount you pay is proportional to your loan to value ratio. This means if you have a larger deposit, you purchase more equity in your home outright that acts as security for your loan, and the amount of LMI you need to pay will be less.
To minimise the amount of LMI that you will pay, you want your Loan to Value Ratio (LVR) to be as low as you can. If you have a higher LVR, the LMI that you are charged for your home loan can be a lot more.
Your LVR is the total amount of money that you borrow to buy a home, expressed as a percentage of the value of the property you are purchasing.
If your LVR is lower than 80%, you won’t need to pay Lender’s Mortgage Insurance. If it’s higher than 80% the amount you need to pay depends on how much higher it is.
To get an idea of what your Lender’s Mortgage Insurance (LMI) might be it’s best to speak to a mortgage broker. You can talk to one of our mortgage brokers to find out what your LMI will be if you take out a home loan by yourself.
What if my family will help but don’t want to re-mortgage their property?
There are no any direct financial rewards for the guarantor to a mortgage. If you have a family member who wants to help you get into your first home but doesn’t want to risk the financial and legal consequences of being a guarantor, there is still a way they can help you out.
A family member can give you a gift of money to make up your deposit amount. This way you can still save on Lender’s Mortgage Insurance. You’ll need to hold the money in a bank account for 3 months before applying for your home loan pre-approval. Your beneficiary will need to sign a statutory declaration stating that the money isn’t required to be repaid also.
This means that you still get into your new home as soon as possible, but the family helping you out aren’t affected legally, and they retain their full borrowing power, allowing them to remain active in the property and investment markets.
To find out all the options you have to buy a home, contact a mortgage broker. It's easy to fill out a home loan pre-approval form, and one of our mortgage brokers will be in touch with you at a time that suits. You can also call 1300 366 287 to speak to a broker or make an appointment, or explore our website for heaps more information about home loan options and the home buying process.