It is becoming increasingly difficult for Australian homebuyers to save up for a deposit. Although initiatives such as the home loan deposit scheme and the stamp duty concession are assisting first home owners, strict eligibility requirements result in a large number of buyers without support.
A guarantor home loan is a potential strategy for new home buyers (not just first homeowners) which reduces the upfront financial strain of purchasing property and can reduce the monthly repayments of borrowers. A home loan guarantor is generally a close family member who contribute a certain amount of equity in their property to ‘guarantee’ the borrowers deposit. (Note the equity contribution is not a cash payment).
This equity amount will contribute to the size of the deposit, increasing the overall cash deposit that is put down on the property. As a result, a guarantor loan can reduce the upfront cash required by the borrower or can reduce the loan size. A common strategy for borrowers with a family member acting as guarantor is to reach the 20% deposit threshold, which removes the upfront fee of ‘Lenders Mortgage Insurance (LMI)’ saving the purchaser tens of thousands in upfront fees. The added benefits of a guarantor loan is that the relative increased deposit size reduces the Loan to Value Ratio, granting the borrower access to better loan products which charge lower interest rates, resulting in the borrower saving on repayments.
However, there are added risks that are involved with a guarantor loan. The elected guarantor takes responsibility for the home loan, meaning if the borrower cannot make their repayments, the guarantor is required to cover these payments. If the guarantor defaults also, they run the risk of losing their property if the lender requires. Furthermore, going guarantor on a loan can impact that person’s borrowing capacity and credit scores.
Guarantors can be released from a home loan generally once the borrowers have built up enough equity in the home and consistently made repayments, or upon refinancing.
Reach out to us if you are seeking a mortgage broker in Melbourne, wanting to learn more about first home owner schemes or want to know how much you can borrow. We are happy to take a call or email and start a dialogue to help you achieve your financial goals!