Guarantor home loans are the same as other loans, in that you borrow money for a property and then pay back the principal, plus interest. But, they differ in that you can borrow more. In some cases, this may be up to 110% of a home’s value, allowing you to cover buying costs.
Basically, a guarantor home loan is a specialised mortgage secured by another party. In most cases, this is a parent or immediate family member such as grandparents, siblings, or adult children. By being a guarantor, this party assumes the risk should you default on the payment of the loan.
The types of guarantees available include:
- Family Guarantee/ Parent Guarantee – Only used when the guarantor is a family member, rather than a parent of the home loan holder. If a parent acts as a guarantor, then a parent guarantee applies.
- Limited Guarantee – This guarantee secures a part of the loan. As such, it reduces the guarantor’s liability.
- Security Guarantee – Real estate secures the home loan. So, if the property used as security already has a mortgage, then a second mortgage will result.
- An Income Guarantee – The guarantor’s income proves the home loan is affordable. This type of guarantee combines with the security guarantee.
Your loan security includes the property you’re buying and the property owned by the guarantor. A limited guarantee means the guarantor can reduce their risk by setting a security limit. Thus, the guarantor is not responsible for the whole loan, if you default. Instead, they are only responsible for the agreed amount.
If you find you cannot pay your home loan, then contact your lender. In most instances, they can reduce payments for a set period. For instance, if you lose your job you can reduce repayments until you find another occupation and get your finances back on track.
However, if you default on the payment of your home loan for more than 90-days, then you risk having your home sold by the lender. Then, they will make the guarantor pay any remaining debt.
Due to changes in lending standards, no deposit loans have no longer available. Therefore, the only choice is to take out a guarantor loan. Other benefits of this loan include are:
- You don’t need a deposit.
- You can buy a home faster.
- You won’t be asked to pay lender’s mortgage insurance.
- Discounted interest rates are available from some lenders.
- Minor debt consolidation is available.
- Guarantee limits are available.
In the past, guarantor loans allowed borrowers to lend 120% of a home’s value. Though, with changes to lending, you can now only borrow 105% of the purchase price of a home or 100% if you wish to consolidate debts.
In some cases, you’ll still need to have a savings history to qualify for a home loan. Savings include:
- 3 to 6 months of genuine savings history.
- A 5% deposit. On a $300,000 property, this is $15,000.
- Positive rental history that you’ve paid consistently, without any late payments.
Not all lenders will allow you to buy an investment using a guarantor. If you’re interested in this option, then contact a broker to find out more.