A helping hand to buy your home
Many lenders allow a family member to help you to buy your own home by providing additional security. The person providing this assistance is known as a guarantor. This is different to being a co-applicant or co-signer.
A co-applicant is included on the loan and will be responsible for the entire loan until it's repaid in full.
A guarantor, on the other hand, is linked to a loan by a guarantee. This guarantee can be released and the guarantor’s responsibility stopped without the loan being repaid in full. To use a guarantor, you must be able to service the entire loan on your income.
How does it work?
A guarantor allows the equity in his or her own property to be used as additional security for your loan. The primary security for the loan will be your property, but the lender will also take a mortgage over your guarantor’s property. This mortgage will not support the loan directly but will be used to support a guarantee from your guarantor.
Who can be a guarantor?
Guarantors are generally limited to immediate family members. Normally, this would be a parent but guarantors can include siblings and grandparents. Some lenders will allow extended family members and even ex-spouses to be a guarantor to a loan, but this varies depending on the lender.
What are the implications for the guarantor if the borrower cannot pay back the loan?
It is important to note that a guarantor’s ability to borrow will be reduced after they have agreed to act as a guarantor.
How will having a guarantor help your loan application?
If you don't have enough deposit but do have the ability to make the required home loan repayments, a guarantor could help you to secure additional funds to buy a home.
Saving a deposit can be daunting and very hard to do when you're also paying rent. By having a guarantor, you may be able to borrow the full purchase price and sometimes even the costs associated with purchasing property. This varies across lenders – some will still insist that you contribute some of your own equity towards the purchase, even if you have a guarantor.
Another benefit of having a guarantor is that you may save thousands of dollars by avoiding Lenders Mortgage Insurance (LMI). Generally LMI is required for home loans where you have less than 20% deposit i.e. the loan is greater than 80% of the value of the property. LMI is a type of insurance which lenders take out to cover the additional risk of high Loan to Value Ratio (LVR) lending. Although this insurance covers the lender against the risk of you defaulting on your loan, you pay the premium.
The amount of the guarantee depends on the individual lender's policies. The guarantee can vary from the full loan amount to as little as 20% of the loan (where the loan is for 100% of the purchase price).
After you've built up equity in your property, your guarantor can ask to be released from the loan. The timeframe to achieve this varies depending on the original deposit, the number of extra repayments made and whether your property has appreciated in value over the time period.
Depending on the lender, you may be required to pay some additional fees to release your guarantor. This can include a fee for the lender to revalue the primary security property as well as lender discharge fees.
Example of avoiding LMI due to guarantor providing security
Say you wish to purchase a $400,000 property and will need to borrow $380,000. This loan has an LVR of 95%, which means you'd need to pay Lenders Mortgage Insurance (LMI).
If a family member is willing to provide a guarantee for your home loan, using the equity in their own property as additional security, the LVR would reduce and you'd avoid the need to pay LMI, saving you approximately $11,600.