When you’re desperately trying to save up a deposit for a home and just see the prices of property climbing and climbing, it’s difficult to remain patient. But there is another way: a guarantor can help.
If you don’t have a substantial deposit for a home loan, there are still a number of ways to obtain finance. These are known as family pledges and there are two types available to borrowers: service guarantees and security guarantees.
Service guarantees are less common than security guarantees, and they involve a family member guaranteeing all of the repayments on a loan, as well as being named on the property title.
A drawback of this approach is that it usually means first home buyers are not entitled to any government grant.
A more popular option is a security guarantee. Borrowers who have a limited deposit often use this approach. In this situation, a relative or friend (usually a borrower’s parent or parents) is prepared to use the equity in his or her own home to guarantee the deposit and possibly costs of the purchase, of the borrower.
For example, for a total loan amount of $600,000, in a security guarantor situation the borrower/s would take on the debt of 80 per cent of the value of their loan secured against the property they have purchased, which would be $480,000, in their own name/s.
The loan for the balance, $120,000 + costs (If applicable), is then guaranteed by the guarantor against the guarantors security (home), limiting the guarantor’s liability to this amount, while providing security for the lender, meaning that lender’s mortgage insurance is not necessary, saving the borrowers thousands. The finance for the guaranteed amount, i.e. deposit + costs (If applicable) is in the name/s of the borrowers and payable by them.
Essentially, the borrower/s would have two loans, one secured against the property they purchased at 80% Loan to Value Ratio and one secured against the guarantors property for 20% Loan to Value Ratio, both loans payable by the borrower/s.
This is a very popular way of first home buyers entering the property market. It works well when borrowers don’t have a substantial deposit, but their parents own their own home or even have a small mortgage on their home. It’s a great option as long as the parents are comfortable with their child’s ability to pay back the loan.
Talk to Darren at Streams Mortgage + Finance for more detailed information on how a Guarantor can help you.