As property prices have risen across the country, mortgage loans have necessarily become larger. Generally, lenders like to see a reasonable deposit on a loan or evidence of savings to minimise their lending risk. As this becomes increasingly difficult, the popularity of a guarantor home loan has spiked. Some of the frequently asked questions about these types of loans include:
What is it?
A guarantor home loan uses the equity in the guarantor’s property as collateral, to top up the value of the cash deposit. No money changes hands however the value of the home equity acts as additional security for the lender and the guarantor becomes responsible for paying back the entire loan in the event that the borrower cannot.
Who can be a guarantor?
Anyone with equity in their own property can be a guarantor, however lenders typically favour close family members of the borrower – parents, grandparents, or siblings. They will need a good credit history, be in a strong financial position and have equity in their home.
What are the benefits of having a guarantor home loan?
There are two main benefits to this type of loan. The first is the ability to get into the property market sooner. This is of benefit when the property market begins to fall, and buyers see an opportunity to enter the market at a lower cost without yet having saved enough for a deposit.
The second benefit is avoiding the cost of Lenders Mortgage Insurance (LMI). This is an insurance that is mandatory when the borrowed amount is greater than 80% of a home’s value. Using a guarantor home loan to avoid paying this insurance can save a borrower thousands of dollars.
What are the risks of being a guarantor?
It’s important to understand the risks of being a guarantor. If the borrower cannot keep up with repayments the guarantor is responsible for covering the debt. This may include having to sell their own home, or having it repossessed.
Being a guarantor on a large loan may impact their ability to be approved for a loan in the future, even if the original loan is being repaid. It may also impact credit history if the loan falls into default, making it harder to borrow in future.
The final risk, whilst not financial, is equally important – and that is the impact on personal relationships. Guarantors should ensure they feel comfortable and willing to assist if the borrower is unable to keep up with repayments as long-term damage to relationships is not easily repaired.
How long is a guarantor on the mortgage?
There is no set period for how long a guarantor remains on the mortgage. How soon they can be removed depends on how quickly the mortgage is paid down, how much equity is held on the property if it increases in value and if the history of repayments is good. In some cases, the guarantor will not be removed unless the loan is refinanced or paid off in full. Your lender or mortgage broker will be able to assist with any required changes.
What documentation do I need for a guarantor home loan?
Guarantors will need to provide the usual identification documentation, typically three forms such as drivers licence, passport, and Medicare card. In addition, lenders will have a guarantor application form and will require information on the property being used as security, such as a council rates notice and a recent mortgage statement if there is one.
Got more questions? Talk to one of our friendly team on 1300 510 045 or get in touch online to discuss guarantor home loans.