How a guarantor can help you buy your first home faster
Australian property prices have soared over the past 18 months, making it ever more challenging for first home buyers to save a deposit. But there could be a way to get a leg up on the property ladder – having the ‘Bank of Mum and Dad’ guarantee your loan.
What’s a guarantor home loan?
A guarantor mortgage is when a parent or close family member uses the equity in their own home as security for part of your loan amount.
This security reduces your loan-to-value ratio (LVR) to 80% or less, so you can avoid paying lender’s mortgage insurance (LMI), which lenders typically charge when your deposit is under 20%. As a result, you might not need to save a cash deposit – slashing years off the time it typically takes to get a foot on the ladder.
That said, you still need to pass the lender’s standard borrowing criteria – as they’ll want to be sure you can afford to service the home loan over its entire term.
That’s because you, as the homebuyer, are still responsible for making repayments on your home loan. However, if you then default on the mortgage, your parents will be held liable for your mortgage.
In the worst-case scenario, this could see them lose their home. So it can be a good idea for them to get legal and financial advice, so they understand the risks involved.
A ‘limited guarantee’ reduces your parent’s risk
You can reduce your parents’ exposure to your mortgage with a limited guarantee. This is when only part of your home loan is guaranteed by your parents. As a result, they aren’t liable for the entire loan amount. Rather, just a portion of it.
Once you’ve repaid that portion – or the property goes up in value (so the mortgage’s LVR is 80% or less) – you can apply to remove the guarantee.
The bigger your deposit, the less of the loan your parents will have to guarantee – further reducing their financial exposure.
How a guarantor home loan works
To see how a guarantor home loan works, let’s imagine you want to borrow $990,000. This amount will cover:
The property’s purchase price = $950,000
Stamp duty, legal fees and other costs = $40,000
To avoid paying LMI, you need a 20% deposit ($190,000) plus stamp duty and legal fees ($40,000) – which you may not have. Your parents step in and use the equity in their home to guarantee this $230,000 shortfall. This will be their maximum exposure (limited liability) as the remaining $760,000 (80% of the value of the purchase) of the loan will be secured on the property you are buying.
What are the benefits of a guarantor home loan?
With a guarantor home loan, you can:
Get your first home sooner at a potentially lower price (rather than waiting to save a 20% deposit in a rising market)
Borrow up to 100% of the property’s purchase price and associated costs while avoiding LMI
Limit the size of the guarantee reducing your parents’ exposure to risk
Release the guarantor from the loan once enough equity has been created in the property
Ready to buy your first home? Event Financial is one of the best brokers in Sydney with over 320 five-star Google reviews. Schedule a no-obligation consultation with Alex to find out how we can help you with your home loan.