Could your parents help secure your first home?
Saving a deposit for a home and getting approved for a loan as a first-time buyer can be difficult. But finding someone to go guarantor could help you get into the property market more easily, so long as you’re aware of everything that is involved.
One way to get a foot in the door could be to ask for financial assistance from your family. It is extremely common these days for parents or even grandparents to give cash to their children or grand children to help them buy a home.
So, what does it mean to have a parent or other family member guarantee your home loan, and what does it involve?
What is a guarantor home loan?
A guarantor home loan allows parents, or someone else who’s close to you, to use the equity in their property as security for part or all of your mortgage. They could also ‘go guarantor’ by contributing cash to help you pay off the loan.
Typically, as the homebuyer you’ll still be the main person responsible for making the regular repayments on your mortgage (including any interest and fees), but if you fail to meet those repayments, the guarantor may become liable to cover them.
The person securing your home loan is known as the guarantor. Like a normal home loan, for a guarantor home loan you would borrow an amount from a bank and repay it, but the guarantor’s equity essentially acts as collateral should something go wrong, which means the bank could take possession of it if your guarantor also can’t meet the repayments.
Your guarantor may choose to only guarantee a portion of the loan, which would mean once you had repaid that portion of the loan, they would be free from any risk to their property should you miss any repayments further down the track.
Who can act as my guarantor?
Lenders generally require your guarantor to be an immediate family member, such as a parent or partner, but some may also allow others such as your sibling or a grandparent to go guarantor. Different banks often have different requirements of what makes someone eligible to be your guarantor, some of which can include having:
- A good credit score
- Equity in a property
- A stable income
How much can I borrow with a guarantor?
Some lenders may let you borrow up to or even above 100% of the value of the property you’re buying if you have a guarantor, but it really depends primarily on the lender, your financial standing as a potential borrower and the circumstances of your proposed guarantor or guarantors. Your lender may still consider whether it thinks you can afford to eventually repay the loan, and some banks may require you to save a certain amount towards the deposit even though you have a guarantor.
If you find you can be approved for a loan at the full value of the property, it’s worth taking a good look at your income and living expenses to ensure you have the capacity to repay the loan with some left over for any unexpected expenses.
It’s important to talk to your guarantor about the loan amount and the amount they are willing to guarantee in advance of entering any formal agreement.
What are some benefits of a guarantor home loan?
One of the main benefits of having a guarantor on your home loan is that it may help you avoid paying Lender’s Mortgage Insurance (LMI). This is typically a one-off fee paid by the borrower to the lender to protect the lender against financial loss should you be unable to meet your mortgage repayments. Lenders typically require borrowers to pay LMI on loans where the borrower has a deposit of less than 20% of the property’s value.
In the case of having someone go guarantor for you, however, the risk to the lender is already minimised by having the guarantor’s home as security. A guarantor can also help you secure funding from a bank if you don’t have enough saved for a deposit of that size, and can help reassure the bank that mortgage repayments will be covered if you can’t pay.
Other possible benefits of a guarantor home loan include:
- You may not have to save as much for a deposit
- It could strengthen your home loan application
- You could get into the property market faster and more easily
While there are clearly some benefits to going guarantor, given it’s such a large financial commitment, it’s also worth weighing up the potential risks.
Other ways your family could help you buy a house
If a guarantor home loan just doesn’t sound like the right option for you, but you still need a little help to get into the property market, your family could help by:
- Paying some money towards your deposit as an informal loan that you can pay back to them over time, which may allow you to put down a 20% deposit and avoid paying LMI.
- Letting you move back home to cut down on expenses such as rent and bills, allowing you to put the savings towards a deposit.
- Co-signing a home loan with you, meaning you would both be responsible for the loan repayments but your parents wouldn’t have to put up their house as security. This could also be seen as an investment property of sorts, that your parents could potentially earn a profit from.
Ultimately the decision to have someone go guarantor for your home loan is a personal one and worth a lengthy discussion.
If you are looking at options to buy your first home be sure to contact us and we can assist you with all your options.