Note: This post has been completely rewritten as of 04 April 2017.
Eva and her husband, Lin, had their heart set on a property worth $500,000. Comparing home loans online, they found even if they borrowed the full amount for 25 years at a variable rate of 4% (At HashChing, you could find even lower interest rates!), they could easily service the repayment amount. However, like many young Australians, they didn’t have $100,000 to put down as deposit for their home loan.
“We felt quite frustrated. While we both are earning well and could comfortably afford the repayments, we didn’t have $100,000 to put down as deposit immediately,” says Eva, while recounting her experience. “In a property market like Australia, if we keep waiting to save the deposit, the prices will soar and we will never be able to own our home. We decided to get in touch with a broker to check our options. Could we really buy a house without a home loan deposit? To our surprise, it turned out that we could!” she adds, happily.
Listen to our partnered mortgage broker how you can get a home loan without having 20% deposit.
The mortgage broker they consulted informed them that apart from paying Lenders Mortgage Insurance (LMI) that could add to their loan amount, a parental guarantee could be used to secure a home loan. Eva’s parents, who’s home is unencumbered (no loan against their home) agreed to help their children by acting as guarantors for their home loan.
“I am grateful to mom and dad. Lin and I are saving hard to build equity faster in the house through additional repayments and release my parents from the guarantee in the next few years. What is great is that there are no charges to release them from the guarantee in the future,” quips Eva, a proud first home owner.
Does Eva’s story sound familiar to you? Do you happen to be one of the many Australians who can afford a home loan but cannot buy a house because you don’t have the coveted 20% deposit? If yes, a guarantor loan could be one of your best options. Here’s all you need to know:
Who is a guarantor?
In simple words, a guarantor is a third party that helps you purchase your home by using the equity in their property as additional security for your home loan. Usually, guarantors are limited to parents, spouse or siblings but some lenders may also allow your friends or other relatives to guarantee your home loan. Mortgage brokers at HashChing can guide you to the right lender for your requirement.
How does a guarantor loan work?
Also called a family pledge loan, a fast track loan or a family guarantee loan, a guarantor loan can help you borrow more than 100% of your property’s cost, covering the accessory costs as well. Essentially, while your home loan is secured against your own property, a lender also takes mortgage over the guarantor’s property as additional security. In case you are unable to service the debt, the guarantor is liable to make good the payments to the lender upto the amount specified in the guarantee. Guarantors must remember that their borrowing capacity may reduce once they agree to guarantee a home loan. It is advisable, and insisted upon by some lenders, that guarantors take independent legal and financial advice before they decide to go guarantor.
Full loan guarantee and limited loan guarantee
While your parents can choose to guarantee your entire home loan with their property, it puts them at great risk if things ever go awry. However, many lenders will happily lend to you if your parents could even provide a limited guarantee for an amount that is enough to reduce the Loan to Value Ratio (LVR) below 80 per cent.
Returning to Eva’s case above, the couple required an amount of $520,000 to cover the cost of the property as well as the accessory costs (use our Stamp Duty Calculator to figure out your additional costs). Rather than guaranteeing the whole amount of the loan, Eva’s parents furnished a limited guarantee for $150,000 secured against the equity in their home, bringing the LVR down to 80 per cent. This enabled Eva and Lin to save thousands on LMI and purchase their first home hassle-free while Eva’s parents also reduced their risk in the transaction.
What to know before you go guarantor:
1. Get independent legal and financial advice before you decide to go guarantor.
2. Are you sure that the borrower can service the home loan? If not, remember, in case of default, the liability of making good the payments will fall on you.
3. Providing a capped guarantee may be a better option. Weigh your decision carefully.
4. Going guarantor will reduce your borrowing capacity.
5. Lastly, in case you have an investment property, it is prudent to use that as a guarantee instead of your own home.
Lending criteria is different for different lenders but most will lend you 100% of the value of the property or even 105% if you are backed by a guarantee. However, few lenders may require you to put up a small deposit as well. At HashChing, we have over 550 mortgage experts from across the country who have access to best deals and rates in the mortgage market. Get in touch to be guided by the best and realise your dream of buying your home now!
By Vidhu Bajaj