Guarantor Home Loans Explained
For first home buyers being increasingly priced out of the property market, guarantor home loans are a tool that can be used to fast track the process.
Imagine this: you’ve spent one, two, or even five years saving up a hefty deposit as a means to purchase your first home, only for a once in a generation pandemic to arrive to Australian shores. The property market skyrockets as a result, and suddenly the 20% deposit you’ve worked so hard for barely amounts to 10%, or even 5%. Deflating, right?
On a national scale, home values are currently up over 20% when compared to the same period just twelve short months ago. As many recent first home buyers know, it’s not repaying the mortgage that’s the hard part. Instead, many identify saving for the deposit as the most difficult component of purchasing property for the first time, and the process certainly isn’t getting any easier. However, if you have access to such a resource, guarantor home loans could provide a unique opportunity to speed up the process of getting into your first home.
How Guarantor Home Loans Work
What if we told you that there was a way to break into the property market faster, with a smaller deposit, avoiding the extra cost of Lenders Mortgage Insurance, and unlocking home loan products with more favourable interest rates? Yes, such a financial product does exist, but there are a few terms and conditions attached.
In simple terms, guarantor home loans are mostly quite similar to a standard home loan. The major point of difference is co-signing a mortgage with a selected guarantor – commonly a parent or guardian – even though they have no rights over the property itself. While guarantor home loans increase your equity and chances of approval because you have someone to “back” you financially, it does come with some risks. In the event that you should default on the mortgage, the guarantor is responsible for paying it back – making it quite the responsibility and a decision not to be taken lightly.
Depending on the lending institute you apply with, it may be possible to borrow over 100% of the purchase price of the property to cover added fees as well. The guarantor doesn’t have to commit to the full term of the loan – most only secure part of the loan (called a Limited Guarantee). Many guarantors have the option to only “cover” the buyer until they have paid back the 20% deposit minimum, or until their property value grows so that the loan balance is under 80% of the property value, after which time their responsibility ceases.
Apart from significantly cutting down on the time it takes to save for a home loan deposit, the major attraction of guarantor home loans is their ability to help an applicant avoid paying Lenders Mortgage Insurance. For the unfamiliar, LMI operates on a sliding scale, and varies depending on how big – or how little – your deposit is. For a home valued at $400, 000, a buyer who has a 10% deposit of $40, 000 can expect to pay almost $7, 000 for LMI. As a general rule, just about all home buyers do everything in their power to avoid this hefty bill, and guarantor home loans offer a way to do so.
However, opting to become a guarantor for someone you love isn’t a responsibility that should be taken lightly. Lending institutes will generally scrutinize the finances of a guarantor, with common criteria linked to being approved including having equity in their existing property and a stable income to satisfy lenders, as well as having a good personal credit rating. A guarantor needs to remember that if their family member defaults on the loan, the guarantor is arguably the one that stands to lose the most financially.
While the paperwork involved in any standard home loan application can be complex, those that involve a guarantor are even more mind boggling. Thankfully, this is when the help of an industry professional can be invaluable in reducing stress and saving time – but where do you find one?
Partnering With The Home Loan Professionals
Navigating the complex world of home loans as a first home buyer has long been regarded as stressful, frustrating and time consuming – but if you can find the right advice on how guarantor home loans work, then the good news is that it doesn’t have to be.
Since their inception in 2012, the team at Madd Loans have worked tirelessly in providing over 2,000 Queenslanders with finance options to help turn their dreams into reality. With the entire brand being built on referrals, owner George Samios takes great pride in making the loan process both fun, educational and stress free – and he has a swag of awards to prove it.
If thinking about your financial future strikes a chord with you, then it might be time to speak to a professional. Whether you’re chasing mortgage solutions or a financial fairy godmother, the team at Madd work together as a collective to turn your goals into reality.