The median house price in Brisbane has hit a record now $635,000, according to REIQ. With prices around this amount, saving up for a sizeable deposit isn’t easy, especially when you’re paying rent too.
Another option for first home buyers to get into the market is to co-borrow or have a family member act as a guarantor for your home.
If you become a co-borrower, aka joint applicant, on a home loan you will be legally responsible for the loan until it is repaid in full. It is common for couples to be joint applicants on a home loan but sometimes friends go in together to purchase property this way. If you are a joint applicant, both sets of income, assets and liabilities will be taken into account to determine the total loan amount.
A guarantor home loan on the other hand, helps you secure your home loan by your parent’s or family member mortgaging a portion of their own property as security for your guarantor home loan. It is also referred to as a “no deposit home loan” because you don’t have to come up with any funds yourself. If you are a first home buyer who hasn’t saved up a deposit (, you can ask your parent’s or a family member to be your home loan guarantor using the equity they hold in their property as security for a portion of your home loan.
Guarantor loans are called different names by different banks and lenders, St George Bank uses the term ‘Family Pledge’, CBA uses the term ‘Family Support’ or ‘Family Equity’, whereas ANZ and Westpac use the term ‘Family Guarantee’. They all mean essentially the same thing. Most of these terms refer to a security guarantee, as only a few select lenders allow other types of guarantees. However, remember there are big differences between the bank’s credit guidelines, loan types and discounts for family guarantee loans.
What are the benefits of a guarantor loan?
- Purchase the property you want rather than having to settle for a cheaper alternative.
- Still be entitled to normal interest rates and the normal suite of home loan products.
- Avoid Lender’s Mortgage Insurance (LMI) because your parents will put up a limited guarantee amount enough to bring your ‘loan to value ratio’ (LVR) down to 80%.
- Your parents won’t need to hand over cash to you, nor will they need to make repayments on their limited guarantee amount while they’re acting as guarantor.
- As you continue to repay your loan and build your own equity, you can remove the guarantee, meaning no-one is liable for your loan but you.
What are the risks of a guarantor home loan?
The major risk – the guarantor is liable – if for whatever reason, you default on your repayments, your family members “guarantors” are liable for the portion of your debt they have guaranteed. In the worst case scenario, if you default on the loan and the bank can’t recover their loss in full when selling your property, they could potentially go after your “guarantor’s” property, as a last resort.
Tips for taking out a guarantor loan
- Calculate your repayments
While a guarantee may mean you can get into the property game earlier, make sure you can actually afford the repayments without stretching yourself too thin.
- Ensure you can afford a rate rise
Interest rates are at record lows at the moment but have you thought about whether you could afford your ongoing repayments if your lender was to increase rates in the future?
- Keep up a good savings habit
While a guarantor home loan means your parents help you take out a loan and avoid the cost of lenders mortgage insurance, you will still be assessed by the bank’s lending criteria, as they will want to see that you can comfortably service the loan. The type of things they’ll check is whether you have genuine savings by looking at your bank and savings account statements for the last 3 months and your credit card and personal loan statements to see if you’ve been on top of your payments.
We recommend you and your parents to sit down with a lawyer before you buy your home, only because if they decide to be guarantor initially and then decide not to proceed after formal approval, then you may be left unable to complete the purchase.
As most often the case, the guarantors are your parents. Your parents could give you a gift as a deposit. In most cases a gift of 10% of the purchase price is enough to allow you to qualify for a loan on your own. This option is suitable for parents who are in a strong financial position or who are not comfortable providing a guarantee secured by a property that they own. But take into consideration, the gifted funds have to be in your own account for at least 3 months prior to buying your home.
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