Are you looking to purchase your first home, but struggling to meet the deposit requirements? A guarantor loan could be the perfect step to help you get into your first home. Despite the current record-low interest rates, many young Australians are able to afford a new home but struggle to save the deposit required to get into a new home. Many lenders require a minimum deposit to get into your first home or otherwise you may be required to pay Lender’s Mortgage Insurance (LMI), which could work out to be thousands of dollars.
What is a guarantor loan?
A guarantor loan is a type of loan in which a guarantor (usually your parents or relatives and subject to bank policy) can assist you in receiving home loan approval by using the equity in the guarantor’s home as security for your loan.
The advantage of a guarantor loan is that it allows you to take out a loan and meet the minimum deposit amount by using the equity in the guarantor’s home and thereby avoid the cost of LMI. This then enables you to purchase a property sooner rather than wait years saving up for the deposit.
What risks are involved?
Of course, like with any loan, there are risks involved. The guarantor will be responsible if you default on your loan repayments. In addition, your guarantor may be required to meet with a solicitor prior to committing to the loan to ensure they understand the terms of the loan and their obligations. There will be a cost to your guarantor associated with this.
How does it work?
You may have saved a 10% deposit, however the lender may require a 20% deposit of the value of the home. You will be liable to pay for LMI if you cannot save the remaining 10%, however with a guarantor loan, the lender can secure the loan using the remaining 10% from the equity in the guarantor’s home. With the separate account, you can pay off the guarantor’s contribution quicker and once the amount is paid off, you can apply to remove the guarantor.
How to set up a guarantor loan?
Before agreeing to be a guarantor, we will sit down with you and your guarantor separately to work out how much is needed to secure the loan. It is important to have these meetings separately to determine the equity in the guarantor’s home and the maximum they will be willing to commit as a guarantor. Once both parties have agreed to an amount, your mortgage broker will help find the most suitable loan to ensure repayments can be made comfortably to avoid defaulting on the loan.
Aside from a guarantor loan, there may be other loan options that we can explore together that will allow you to take out a loan sooner.
Whatever type of loan you decide on, it is important that you work with a trusted and professional mortgage broker. They can help you compare loans based on your personal circumstances and avoid the cost of LMI.
In addition, your mortgage broker can assist you with the loan application process and provide expert guidance from application stage right through to settlement.
If you would like to know more about guarantor loans or any other types of loans, get in touch with us today and we will be happy to catch up over a coffee to discuss the options available to you.