How Do Guarantor Loans Work?

Over the past two years, average capital city house prices have risen by around sixteen percent (16%). That’s great if you’re an investor but for first time buyers trying to save for a deposit, it’s like chasing your own tail. Luckily, there are ways to get into the property market now without having to sell your own parents. In fact, you’ll need them.

If you don’t have a deposit and your parents own their house, one common strategy is to apply for a guarantor loan. The plus side of this type of finance is that you may be able to borrow over one hundred percent (e.g. 105%) of the purchase price, including the stamp duty and other costs associated with buying a home.

Guarantor loans are great for clients that don’t have a deposit for the full twenty percent (20%). On top of that, you won’t be required to pay Lenders Mortgage Insurance (LMI), a one off fee usually charged when borrowing more than eighty percent (80%) of the purchase price. With some lenders, you can even get massively discounted interest rates. Even better, it can be possible to get all of this with no deposit down.

A guarantor speeds up the process, helping you get into a property sooner. In most cases, it can be a parent, a grandparent, or other family member that’s got some equity or security and is happy to offer this to secure your loan.

But don’t rush out the door just yet. There’s a few things to keep in mind. Some lenders will accept a second mortgage on your parent’s home but they need to have sufficient existing equity in the property. Other lenders will not accept a second home loan at all and may even require that your parents have a job in order to mitigate some of the risks.

Alternatively, your parents can use an investment property or money in a term deposit as security for the guarantee. Although you won’t need a deposit with a guarantor loan, some lenders have harsh scoring and may require borrowers to have at least some savings in their own name.

Luckily, in some situations, your parents can either gift or lend you the money for the deposit. In addition, some lenders will even consolidate any small existing debt you might have including credit cards or car loans into your mortgage. You should remove the guarantee as soon as you owe less than eighty percent (80%) of the property value. Either from the property going up in price or from you paying down the loan.

Most people are able to remove the guarantee around three to five years after they initially set up the loan. If you’re struggling to save for a deposit in a rising property market, now’s the perfect time to be that extra little bit nicer to your mom and dad. A guarantor loan may help you buy your dream home.

Pearl Financial is a specialist mortgage broker that can help you with your guarantor loans and which lenders can help. So contact us for a free, no obligation discussion.

Author: Shane