Using a Guarantor to Help Secure a Home Loan
Saving for a deposit can be daunting and very hard to do when you’re also paying rent.
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 the funds to buy a home.
HOW DOES IT WORK?
- A guarantor allows the equity in their own property to be used as additional security for your loan – usually the amount needed to reduce your loan-to-value ratio (LVR) to 80%.
- The primary security for the loan will be your property, but the lender will also take a mortgage over your guarantor’s property.
- The guarantor isn’t required to make any payments on your loan.
- To use a guarantor, you must be able to service the entire loan on your income.
- Using a guarantor can be a way to avoid the cost of lenders mortgage insurance (LMI), possibly saving thousands of dollars.
- 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.
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, but this varies depending on the lender.
WHAT ARE THE IMPLICATIONS FOR THE GUARANTOR IF THE BORROWER CANNOT PAY BACK THE LOAN?
If you’re unable to pay back the loan according to the terms of your contract, the lender can take legal action against you, and in some circumstances, your guarantor. Your guarantor will be liable for the amount specified in the guarantee.
Anyone who is considering being a guarantor for a property loan should seek independent legal and financial advice before accepting the role. Most lenders will insist on this, prior to accepting a guarantee.