Debbie Shankar - 12 Jan, 2015

Guarantor Home Loans on the Rise

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Research suggests that entry into the Australian property market is now four times the average Australian income, which makes it difficult for many first home buyers to break into the market.

According to the Australian Bureau of Statistics (ABS) first home buyers have fallen to 11.8 percent. But, five years ago, they made up almost 25 percent of the market. Two of the biggest factors contributing to falling first home buyer numbers are housing affordability and changes to the Government First Home Buyer Grant.

Changes in the Property Market

Changes in the home buying market have meant that new home buyers may need to change their strategy if they are seeking to buy a home. While saving a 20 percent deposit for home buying is ideal, many first home buyers don’t find it practical or always possible. Therefore, in order to raise enough capital to satisfy lender requirements, young home buyers are turning to their parents and other family members for assistance.

Guarantor Home Loans

A guarantor home loan allows a parent or other family member to provide additional financial security for a home loan. In order for a family member to act as a guarantor, they’ll need to be buying or own a home that has equity. This equity can then be used as security for the property that the first home buyer is purchasing.

The equity in the guarantor’s property can be used to borrow up to 107 percent of the first home buyer’s property without having a deposit. This, in turn, allows the first-home buyer to avoid paying Lender’s Mortgage Insurance (LMI), which can be costly and add thousands, possibly tens of thousands, to the purchase price of a home.

Risks of Being a Guarantor

Of course, being a guarantor comes with responsibilities. Firstly, you’ll have to sign a contract where you are agreeing to cover whole or a part of the first home buyer’s loan, should they not be able to make repayments. Then, if the repayments are not made, you’ll have to make them on the other person’s behalf, otherwise you’ll risk losing the asset you’ve used to secure the loan with.

Before agreeing to become a guarantor, know the facts of the agreement. Know how much you are agreeing to guarantee, and how much repayments will be if the other party defaults on home loan payments. Also make sure you have enough to cover these costs so you don’t risk the loss of assets.

Do you want to know more about guarantor home loans? If so, then contact eChoice, we can help you.

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