Loans Series #3 Guarantor Loans
The idea of homeownership for young people has become increasingly difficult to grasp a hold of as housing affordability worsens. The 2017 Perceptions of Housing Affordability Report by CoreLogic revealed that housing affordability has deteriorated over the past 15 years, as the cost of living has risen without a matched increase in incomes to compensate.
The cost of buying a home currently takes 7.2 times the annual income of a typical household – up from 4.2 times 15 years ago. In this way, it has become challenging to save up a sizeable deposit for a home loan, especially when paying rent.
However, there is an option for first home buyers to get onto the market much sooner than expected: get a family member to act as guarantor for your home loan!
While many lenders allow this type of arrangement, it is vital that both parties understand the risks as well as the benefits.
Guarantors vs. co-borrowers
A guarantor helps you to secure your home loan by mortgaging a portion of their property as security. This guarantor can be released without the full amount of the loan being repaid. Most banks will only allow parental guarantors, though there are some instances where other immediate family members such as grandparents, siblings and de facto partners are considered.
This contrasts with a co-borrower or joint applicant who are legally responsible for the loan until it is repaid in full. In this case, the lender takes both yours and the joint applicants income, assets and liabilities into account to determine the total loan amount.
In both instances, independent and legal advice from a solicitor, accountant, financial advisor or mortgage broker should be sought to ensure both parties fully understand the implications of their home loan.
When can a guarantor be beneficial?
If you are a first home buyer who hasn’t saved up a deposit valued at 20% of the property value, you can ask a family member to be a guarantor to supply you with the equity. The amount that is secured is up to the guarantor – it can be as little as 5% of the loan amount and can extend to the entire loan amount.
Having a guarantor can save you thousands of dollars. Getting a family member to help you out can allow you to avoid the hefty costs of Lender’s Mortgage Insurance (LMI), which is required when you have less than a 20% deposit. You may also be eligible for a cheaper interest rate.
What are the risks?
There is one main risk both parties need to be aware of: if you are unable to make repayments, your guarantor can be made liable for your mortgage. In the worst-case scenario, if you default on your loan due to unforeseen circumstances and the bank cannot recover the costs (even after selling), they could potentially go after your guarantor's property.
It’s helpful to note that they can only retrieve the portion your guarantor secured the loan with. Therefore lenders are more likely to prefer guarantors on investment homes rather than owner-occupier homes.
Some things to think about when taking out a guarantor home loan
• Make sure you can afford repayments – calculate how much it will cost you per month to take out a loan and whether you can cover the costs along with your other expenses.
• Ensure you can afford a rate rise – if you choose a loan with a variable interest rate, you need to be prepared for the fluctuation of those rates.
• Keep up a good savings habit – create and stick to a budget. Pay off your credit card debts on time, and make sure you at least have some emergency savings to fall back on if unforeseen circumstances arise.
• Take out mortgage protection insurance – unlike Lender’s Mortgage Insurance (LMI), this kind of coverage protects YOU in the case where you lose your job or become ill. It will take care of your repayments for a set period until you get back on your feet.
At Select, we offer no-obligation, quality and free home loan advice to help you reach your financial goals. Give us a call on (08) 9417 3399 to talk to us about your home loan options that suit your circumstances.