What’s a Guarantor Loan and How Does It Work?

Buying your first home is an unforgettable milestone, but saving for a deposit can be a challenge. If you’re struggling to reach that 20% deposit, a guarantor loan might be the solution to get you into your dream home sooner.

What Is a Guarantor Loan?

A guarantor loan involves a relative, usually a parent, using the equity in their property as additional security for your home purchase. It’s a popular option for first-time buyers, with studies showing a significant increase in parents assisting their children with home deposits over the past decade.

Why Consider a Guarantor Loan?

Typically, a 20% deposit is required to avoid paying Lenders’ Mortgage Insurance (LMI). However, with rising living costs, saving this amount can be challenging. A guarantor loan can help you bypass this hurdle, sometimes even allowing you to purchase a home without any deposit. Additionally, it can help you avoid LMI, which is usually applied when borrowing more than 80% of the property’s value.

Who Can Be a Guarantor?

A guarantor is usually a close relative, such as a parent, grandparent, or sibling, who agrees to use their home equity as security for your loan. Equity is the difference between the value of their property and the amount they still owe on it.

How Does a Guarantor Loan Work?

The guarantor doesn’t need to provide any money upfront. Instead, they offer part of their property’s equity as security. For example, if you’re buying a $600,000 property and have saved a $60,000 deposit (10%), you would need an additional $60,000 to reach the 20% deposit requirement. Your guarantor can use $60,000 of their home equity to cover this difference, helping you avoid LMI. However, if you default on your repayments, your guarantor may be liable.

Once you’ve built enough equity in your home, either through repayments or an increase in property value, the guarantor can be released from the loan (note that fees may apply).

Risks to Consider

While a guarantor loan can be a great stepping stone, it’s crucial to understand the risks. If you default, your guarantor will be financially responsible. Additionally, the guarantor’s equity will be tied up in your property, potentially affecting their ability to sell or refinance their own home. The emotional impact of involving family in your financial matters should also be considered.

It’s advisable to seek both legal and financial advice before entering into a guarantor loan agreement.

Ready to Explore Your Options?

At Jais Lending Solutions Pty Ltd, we’re here to guide you through the complexities of home financing. If you don’t have a 20% deposit saved, a guarantor loan could be the right solution for you. Reach out today to explore your options and find the path that suits your needs. 🏠