What is a guarantor?
Finding that 20% deposit for your home isn’t easy however there are ways that your family could help. One way is by acting as a guarantor to help secure your home loan. Find out more by watching our Jargon Buster video.
Finding that 20% deposit for your home isn’t easy however there are ways that your family could help. One way is by acting as a guarantor to help secure your home loan. For example, let’s say David wants to buy a property worth $500,000 and has saved a deposit of $25,000.
This means he is looking for a loan of $475,000 against a home valued at $500,000 which is a loan to value ratio of 95%. This would usually require Lender’s Mortgage Insurance at a cost of roughly sixteen and a half thousand dollars. The lending value of the home that David is buying is calculated at 80% of its value – meaning it provides a lending value of $400,000.
He needs an additional $75,000 of security cover for a $475,000 loan. However, David’s parents may be willing to offer a family guarantee for that amount helping him to buy the house and avoid the cost of LMI. This guarantee though needs to be supported by a mortgage over their home or a charge over a term deposit.
By providing a guarantee, they become David’s guarantors. As guarantors, David’s parents are then liable for his loan up to the amount of their guarantee. This means that if David doesn’t make his repayments or breaches the conditions of the loan, his parents may be required to pay the financier the amount of their guarantee.
The guarantor may request release of their guarantee once the required loan to value ratio is reached – usually 80%. This can be achieved by David’s loan amount reducing due to repayments being made or the property value increasing - once again freeing up Mum and Dad’s equity.
The benefits for David are clear. He doesn’t need to save as much so can potentially buy a home sooner and he can reduce or avoid Lenders Mortgage Insurance costs. The benefit to the family is that they can help David get into his home without physically having to gift or lend him the money. There are risks though so it’s important to understand these and get professional advice before agreeing to be a guarantor.
Providing a Guarantee is one way that family members may be able to help their parents, siblings or offspring to buy their home sooner.