Guarantor Home Loans Australia
When the option to buy a house comes along with getting the help of a dear family member or friend, a guarantor loan is your go-to funding solution.
So, you have found your dream home – everything from price, size, and location is perfect. The only thing standing in your way is getting the home loan approval required to make the purchase. If you fit the lender’s requirements, getting a mortgage can be pretty straightforward. If you fit these requirements, you can work with a mortgage broker in Sydney to simply complete the needed paperwork with your income, assets, deposit, and credit score.
This is the ideal scenario. However, it is not always the case for all borrowers. For many borrowers, they will need some additional help to secure the right loan. In that case, when you do not meet the lender’s requirements, you have the option to apply for a loan with a “guarantor’s” help. So, how does this loan work? What are its pros and cons? And is a guarantor loan worth it?
What is different about a guarantor loan?
A guarantor loan is a specific home loan type that requires you to get a family member or friend to guarantee that you will be able to meet your mortgage repayments. If you miss a repayment, it will be up to your guarantor to make it. This gives lenders an extra degree of assurance as they are no longer exclusively depending on you to make the payments if you do not meet the typical approval requirements.
Getting a guarantor loan is the most common way of avoiding the lender’s mortgage insurance or LMI. However, it does require that you have someone in your close circle with the means to pay off your debts and that that person will be willing to put their finances on the line for you.
Guarantor loans are popular amongst first home loans, with buyers typically relying on parents as guarantors. A guarantor loan empowers a potential buyer to finally enter the market and realise their dream of finally owning a home, with the security of someone close by.
Understanding the risk of a guarantor loan
Before asking your friends and family to sign on to your mortgage, it is crucial that you understand all the risks associated with this type of home loan. Your Lendstreet mortgage broker will be able to go through these with both you and your guarantor extensively. The main guarantor loan risks include:
Cases where you default on your home loan
In these cases, if you default on your home loan, your guarantor will need to pay for the entirety of the debt. When bringing on a guarantor, you must discuss ahead of time your financial status and if you will have any difficulties meeting bills and other payment obligations. You need to be as transparent as possible on how you plan to make repayments to your home loan, so that they fully understand how they fit in the picture, and the risks at play. When you know you cannot make a repayment, make sure to inform them ahead of time.
Remember that apart from needing to repay the entire debt amount, defaulting on your home loan will dampen your guarantor’s credit score as well as your own, making it hard for both of you to get loans in the future.
Being a guarantor may reduce their options of getting a loan
Guarantors applying for their own home loan need to inform lenders about existing loans wherein they are the guarantor. Lenders will factor this in as this means that the guarantor is already obligated to make a priority payment in the case that your home loan defaults, which could impact their own eligibility and reduce the possibility of them getting their desired loan.
Risk to your relationship
Money can often come between the middle of relationships. Apart from the financial effects of defaulting on your loan, it’s also important to consider the potential effects on your relationship with your guarantor, if something happens. Before your guarantor signs on, you should have an in-depth conversation regarding this topic to ensure that you are both on the same page.
Benefits of a guarantor loan
However, you should not be discouraged as there are many benefits associated with this type of loan that should be equally considered as well. With the assistance of an experienced mortgage broker, a guarantor loan can be a financially viable decision for you and your guarantor! Benefits include:
- Not having to pay Lenders Mortgage Insurance (LMI)can save you thousands of dollars
- You will be able to get a home loan even with a smaller deposit
- You will be able to enter the property market much faster
- Guarantor loans get approval much quicker than loans with LMI, as LMI loans need to be reviewed extensively
With a guarantor loan, your friends or family can help make your dreams of owning a home a reality. Still, as this is a big financial decision, having an excellent mortgage broker who can guide you through all of the risks and benefits of this choice can make all the difference, both for you and for your guarantor.
Frequently Asked Questions
What is a guarantor home loan?
A guarantor home loan is a specific type of mortgage where a third party, typically a close family member or friend, acts as a guarantor or a ‘back-up’ for the loan. If you are unable to make your mortgage repayments, it becomes the responsibility of the guarantor to make it.
A guarantor home loan can significantly help your chance of mortgage approval, particularly if you are struggling to meet the usual lending criteria like credit score, income level, or a lower deposit availability. It gives lending institutions an extra degree of assurance, as they are no longer exclusively reliant on you to make the payments.
Guarantor loans are particularly popular with first-time buyers, who will often use their parents as their guarantor. A guarantor home loan empowers potential buyers in Australia to finally enter the property market and secure a home of their own.
It is important to note the importance of trust and choosing the right guarantor in this process. This person will need to have a good credit history, and they will need to have the financial means to support you if necessary. Additionally, they need to be willing to put their own finances on the line for you.
Who can be a guarantor for my home loan?
Typically, a guarantor is a close family member, such as a parent, sibling, or spouse. However, it doesn’t have to be a relative. It can also be a close friend, or even a business partner. As long as the potential guarantor meets the lending institutions criteria, they can fulfil this position.
For the lender, they will carefully evaluate the financial capabilities of the guarantor to ensure they have a good enough credit history and the financial means to make repayments when it is necessary. The lending institution needs to be certain that if you cannot make the repayments yourself, the guarantor can on your behalf.
Regarding your own considerations, you need to make sure that the guarantor is someone you trust, and someone who is willing to put their finances on the line to support you. It is vital that you have open discussions with your potential guarantor, confirm their financial capabilities, and seek professional advice before making your decision if necessary.
How will a guarantor help me with my mortgage?
Particularly if you are a first-time buyer, or you are struggling to meet the criteria from the lending institution, a guarantor mortgage loan is a great option to help you secure a mortgage.
If you’re struggling to get approval because of your credit history, lack of income, or high levels of dept, a guarantor will help you to get approval. With a guarantor in place, the lender has the increased security and assurance that if you cannot make the repayments, there is someone available who can.
What does a guarantor on a mortgage do?
A guarantor on a mortgage acts as a secondary source of payment, or a ‘back-up’, in a scenario where the primary borrower is unable to make their repayments. For the lender, the guarantor acts as a security blanket, providing an additional layer of assurance that the mortgage will be paid for, even if the borrower finds themselves in financial difficulty.
In a case where the borrower is unable to make repayments anymore, the guarantor steps in to cover the payments and pay off the remainder of the mortgage. Therefore, it is vital that the guarantor has exceptional credit history and has the necessary funds to step up in this situation.
Does a guarantor have to provide any cash or pre-payments?
No – this is not the responsibility of a guarantor. They do not need to provide any cash payment, contribute to the deposit, or exchange any money with the primary borrower. The sole responsibility of a guarantor is to take over the payments if the guarantee is no longer able to make them. Until this moment, there is no obligations on the guarantor to supply actual funds.
How much can I borrow with a guarantor mortgage in Australia?
The amount you can borrow with a guarantor home loan in Australia is dependent on multiple factors, including the value of the property you are trying to buy, the income of both you and your guarantor, and the lending institution’s criteria.
A guarantor loan will allow you to transact without a deposit enabling you to borrow the full purchase price of the property plus costs. The extra security and assurance associated with this type of loan, provides you with more purchasing power.
Typically, with a guarantor home loan you can borrow up to 110% of the property value, once you have a suitable guarantor that provides the required security to the lender. Without the extra security of guarantor, you will struggle to borrow more than 80% of the value of the property, showing the significant benefits of this option. For many, it is the difference between getting the home they want, and not.
As we explained above, it also significantly helps to get approval from the lending institution, particularly if you are struggling to meet their criteria.
Is a guarantor mortgage easy to get?
While buying a home can often be a stressful process, it doesn’t have to be. If you meet the lenders requirements, getting a mortgage can be a quick and easy process. By opting for a guarantor mortgage, you can make this process even easier for yourself and it can significantly enhance your chances of getting approval.
A guarantor provides additional security and assurances for the lending institution, and therefore means the criteria for you to get approval is less strict. Once you get approval for your mortgage, you can then work together with your mortgage broker to complete all the necessary paperwork that has your income, assets, deposit, and credit score. Working with an expert takes away the pressure and uncertainty in this process, and it can make the experience of buying your home a lot more enjoyable.
At Lendstreet, we take pride on making this process as simple, and stress free as possible for you. If you have found your dream home, and you’re not sure where to go next, reach out to our team and we can work together to make this dream a reality.
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