First-time buyers can get financial assistance from others to help fund the purchase of a home or apartment. It’s a terrific way to get a head start on home ownership. However, you need to keep in mind that using guarantors, whether they be parents, other relatives, or close friends, can pose hazards.
Whether you’re new to the market or an established owner looking to help the younger people in your life get a foot on the property ladder, it’s important to understand the risks as well as the benefits.
Getting someone to guarantee a loan
If you don’t have the customary 20% – or even 10% – down payment for a home loan, there are a few options for obtaining the credit you need. The most common method is known as a family pledge, and borrowers can choose between two types: service guarantees and security guarantees.
Service guarantees
Service guarantees are the less common type of loan guarantee, very few lenders do them these days because they entail a family member guaranteeing all loan instalments so the guarantor is essentially borrowing the money for you.
Unless there are considerable extenuating circumstances, lenders really aren’t keen on servicing guarantees because the risk is very high for the guarantor.
Security guarantees
A security guarantee is a more common choice. Borrowers with a small deposit will frequently employ this method. A relative or friend (typically parents, grandparents, or another family member) leverages the equity in their own house to guarantee the borrower’s deposit. Put another way, they are guaranteeing a new loan using their own home equity.
In a security guarantor situation, for a total loan amount of $600,000, the borrower might take on the obligation of 80 percent of the loan value, which would be $480,000, in their own name.
The remaining $120,000 loan is also borrowed in the names of the borrower with the guarantor guaranteeing repayments and allowing them to secure this portion of the debt against their property. The guarantor’s liability is limited only to this smaller portion of the overall lending.
Your Mortgage Broker Group Broker will perform a private, independent enquiry into the risk the guarantor is considering entering into, to make sure it is safe and appropriate for them.
Your Broker will also advise the guarantor they must obtain independent legal advice about their rights and responsibilities as guarantors.
Benefits of using a guarantor
Using a guarantor to join the property market is a popular option for first-time buyers. It’s especially beneficial when the borrowers don’t have a large down payment but their parents own a home. Borrowers with a 20% deposit can get better loan terms and avoid paying costly Lenders Mortgage Insurance. It’s an efficient approach to buy a home as long as the guarantors are confident in the borrower’s capacity to repay the loan.
A word of caution
Unfortunately, marriage dissolutions, death, and financial difficulties (from both borrowers and guarantors) can occur unexpectedly and have a significant influence on a loan guarantee arrangement. Seek competent guidance and have formal legal agreements in place to cover any unanticipated events.
Please contact us.
Speak with a Mortgage Broker Group professional to find a solution that will allow you to buy your own home sooner. We are MFAA-accredited and provide our services for free (lender fees and charges will apply if you get a loan). We can assist you in navigating the home loan market and locating the best deal for your specific situation.