Buying a home is a daunting process, but it can be made easier with guarantor loans.
You’re likely to have heard of these kinds of loans from well-meaning friends and family members — and for a good reason! These loans make it possible for first home buyers to enter the property market with minimal cash outlay and low interest rates.
In this blog post, we’ll take a look at what exactly guarantor loans involve, the eligibility criteria and how they could help catapult you into your dream home.
First off, what is a guarantor?
A guarantor is someone who agrees to provide collateral in order to help another person gain access to a loan or line of credit. They act as a financial backstop in case the borrower can’t make the agreed upon payments.
How does guarantor work?
A home loan guarantor helps the borrower by vouching for their character and creditworthiness. This allows lenders to extend more favourable terms and lower interest rates than they might offer otherwise.
Individuals that are going guarantor for home loan agree to take on the responsibility of repaying any outstanding balance if the borrower defaults. In some cases, this may include interest and/or penalties incurred due to late payments or non-payment.
Who can be a guarantor?
Typically a family member (i.e., parent, grandparent, or sibling) or close friend acts as guarantor for these types of loans as trust between all parties involved is imperative. In some cases it may also be possible for ex-spouses, property owners or employers to act as guarantors if necessary and agreed upon by both parties.
To be a guarantor on a mortgage, you must:
- be an Australian citizen or a permanent resident
- be between 18-65 years old
- have at least 80% equity in their property
- owns the property
- have property in Australia
- have outstanding credit rating
What does a guarantor need to provide for a loan?
One among the many guarantor loan requirements Australia is to put up security equal to the amount of the loan. This could be property such as real estate (must be in Australia) or major assets like cars and boats.
The guarantor also has their own credit history checked by lenders, so it’s important that they have good standing with their creditors. They will likely need proof of income and assets too in order for the loan application to move forward.
For those going guarantor on a home loan, note that participating banks and lenders may ask for additional documents from both borrower and guarantor such as utility bills, tax returns statements etc., just like any other type of loan application process. It’s important that each party understands what kind of commitment they’re taking on before signing any agreement in order to avoid legal issues later down the line.
So then, what is a guarantor home loan?
Guarantor home loans are a type of mortgage where an individual/individuals guarantee full repayment of the loan and take on legal responsibility if the borrower fails to do so.
This means that the guarantor agrees to be held liable for any unpaid amounts left by the borrower.
The primary benefit of a guarantor home loan is that it is helpful for those who are having difficulty obtaining traditional borrowing due to lower incomes or less established credit histories. It also allows borrowers access to better terms and lower interest rates than they would qualify for without one.
How does a guarantor loan work?
Here’s how a guarantor mortgage works:
For example, you are about to purchase a home valued at $800,000. You need to have a 20% LVR deposit so you don’t pay the Lenders Mortgage Insurance. That means you have to have $160,000 upfront.
However, you were only able to save $80,000: that’s only 10% of the required deposit. You can then take out a guarantor loan Australia where your nominated guarantor helps out with the remaning 10% deposit. Your guarantor can do this by tapping $80,000 off their own home equity to secure your loan.
Some guarantor loans Australia also allow you to borrow up to 100% of the property purchase price (even as high as 110% when you consolidate other debts into the loan). Terms and conditons of a guarantor loan depend on your lender of choice and the financial circumstances of your guarantor.
Are guarantor loans an option for you?
Guarantor loans are a fantastic way for first home buyers to get into the property market. If you’re thinking of applying for one, be sure to do your research and seek the help of a mortgage broker or financial advisor to ensure it’s the right fit for you.
Thanks for reading!
