Getting into the property market can be challenging with rising property prices and strict lending criteria. Which is why many young home buyers are turning towards a guarantor home loan to help get them into the market. By having a parent or close relative guarantee a portion of the loan, many renters can get approved for a home loan when they weren’t able to previously.
However, there are some risks involved with guarantor home loans, so it’s important you understand as much as possible before you choose to go this route.
At No1 Property Guide, we specialise in no or low deposit new homes that generally don’t require a guarantor. This is only possible due to Darren Walters’ unique pre-qualification process combined with his deposit boost system.
Darren has 20 years’ experience in property, lending and banking policies, and he understands the ins and outs of guarantor home loans and their risks. Which is why he put together this article to highlight everything you need to know about a guarantor home loan and the risks involved.
What is a Guarantor Home Loan?
A guarantor home loan is where someone acts as a guarantor for a certain amount of the home loan. These are most common when the borrower doesn’t have enough savings to front a 20% deposit but can service the loan repayments.
The main benefit in a guarantor home loan is the banks won’t charge LMI. This can be a huge saving depending on the loan amount and can save some homeowners over $20,000.
There are also limits to how much equity the guarantor is able to use for the loan. But this can and will vary from lender to lender.
For the borrower, there isn’t much difference between a guarantor home loan and a traditional home loan. Except for some extra pressure to ensure you’re paying your mortgage repayments on time.
Who Can Go Guarantor on a Home Loan?
Generally, most lenders will only accept parents, siblings or close relatives to go guarantor on a home loan. Being a guarantor is a big decision, and comes with a number of risks, so lenders will only consider guarantors that have a close connection with the borrower.
In some cases, distant relatives, partners, and close friends can be considered. But you’ll need to discuss with your lender about any conditions you’ll need to meet.
Home Loan Guarantor Requirements
Because becoming a guarantor on a home loan is such a big decision, there are a number of strict requirements you will need to meet. First of all, like we already discussed, a guarantor will generally need to be a parent or sibling.
This is probably the requirement that’s the easiest to get around as some lenders will be flexible about who can become a guarantor. As long as you can prove they have a close relationship to you, and they meet the other criteria.
The major criteria for a guarantor is having the equity to put towards the guarantee. Most of the time this will come in the form of a home or property that has already been paid off. By drawing on the equity of their home, the guarantor will be able to put the decided amount towards the loan to help.
If a guarantor doesn’t have any equity, they won’t be able to act a guarantor for the loan. On top of that, the amount put towards the loan cannot be more than 50% of the equity available.
For example, if your guarantor has $500,000 in equity, they would be able to offer $250,000 as a guarantee at most.
The final requirements are to protect the guarantor.
Lenders will request to have a one-on-one meeting with the guarantor (without the potential borrower) to go over the risks and possible outcomes for acting as a home loan guarantor. This is to ensure the guarantor isn’t being pressured or persuaded by the borrower.
And, when the paperwork is sent, the guarantor will have to wait 3 days before signing and confirming. This is another chance for the guarantor to change their mind or get out if they are being pressured into signing.
Of course, some lender’s may have additional requirements and you’ll need to consult with your bank or lender to confirm any extra conditions you need to meet.
As we’ve pointed out, being a home loan guarantor comes with some risks. Exactly what is at risk will depend on the terms and conditions of the home loan. At No1 Property Guide, we always recommend you fully read and understand any contract before signing. We also recommend you seek financial advice when considering being a home loan guarantor.
The main risk for a guarantor is fairly obvious. If the borrower is unable to meet the repayments and defaults, you will need to cover the repayments. The amount you will need to repay will vary on a few things.
First of all, some lenders will allow you to only guarantee a set amount. This is a fantastic option if you’re worried about being financially burdened. As you can avoid needing to pay a large debt or having to sell your home to cover the costs.
But, if your guarantee is not for a set amount, and the borrower defaults, you may need to cover any remaining debt. The amount will vary depending on how much of the loan has been paid. As well as what the lender was able to sell the property for.
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If the market is down when they sell the property, the owing figure could be quite high.
You also might have trouble getting finance or loans while acting as a guarantor. Some lenders might turn you down if they deem you as overcommitted financially.
Of course, there are also some non-financial risks in acting as a guarantor as well.
There is a chance of your relationship with the borrower turning sour or going downhill if the loan repayments aren’t met and you need to cover for the borrower. Especially if you end up needing to sell your own home to make the payments. This is something you will need to consider when acting as a guarantor as well.
How to Release a Guarantor From a Loan
Becoming a guarantor doesn’t mean you’re stuck on the loan for the full 25-30 years luckily. The guarantor can ask to be released from the loan at any time. Though lenders will generally only consider this if a few conditions are met.
Namely, the loan repayments have been made on time, and the LVR is under 80% so LMI isn’t added. Sometimes the LVR can be above 80%. But only if the borrower can show they are willing and able to afford the additional LMI cost. But this will come down to the lender.
In cases where you’re only guaranteeing a set amount of the loan, you may be able to get released from the home loan once that amount has been paid. But as always, you will need to discuss with the lender to get exact terms and conditions.
Alternatives to a Guarantor Home Loan
Guarantor home loans are a good option for young buyers who have parents or relatives that can help them. But they’re not always the best option or available for every home buyer.
Understanding your factual options is always the first step towards getting your own home. It’s one of the most crucial factors in the journey. The best way to understand your options is to use Darren’s unique pre-qualification process to discover your borrowing capacity.
This will give you a good idea of what you can likely borrow through Darren’s no or low deposit system.
Of course, No1 Property Guide can also incorporate a guarantor home loan into your no or low deposit loan to ensure you get the best possible outcome if you have someone who is willing to act as a guarantor.
Contact our New Home Specialists to understand all your factual new home options today.