What is a guarantor home loan?
Guarantor loan is a loan which involves a person – generally a family member – providing a guarantee using their property as additional security to allow you to borrow more than 80% Loan to Value Ratio (LVR) without having to pay lender’s mortgage insurance (LMI). This allows you to get into the property market sooner even when you have less than 20% deposit.
Example of how the guarantor loans work
Let’s say you are looking to purchase a property for $600,000 and you have saved up a deposit of $30,000 (5% of the property value).
To avoid paying LMI, you would normally need to have 20% deposit which is $120,000. This means you would have to save up $90,000 more.
By doing a guarantor loan, a family member can guarantee the $90,000 using their property as additional security, saving you thousands of dollars on potential LMI fees and allowing you to get into the property market sooner.
What you should consider or be aware of
Guarantor loans allow you to maximise your borrowing with the bank/lenders without paying LMI when you have a minimum deposit. This means that you would need a higher borrowing capacity as well as committing to a higher ongoing loan repayment compared to if you had a 20% deposit and borrow at 80% LVR.
Although the guarantor providing the security guarantee is not responsible for the ongoing loan repayments, if the borrower fails to make the ongoing repayments, the guarantor will be liable for the loan.
Independent legal and financial advice is highly recommended if you are looking to go on as a guarantor.
What is the minimum amount of savings I need to get a guarantor loan?
Generally, you would need at least 5% deposit to satisfy the ‘genuine savings’ criteria. This demonstrates to the bank that you personally have the ability and discipline to put aside your money after expenses and commitments. However, there are situations where you can even borrow up to 105% if you can demonstrate the genuine savings through your past rental payment history or shares.
Who can be a guarantor?
A guarantor is generally limited to an immediate family member such as your parents, but guarantors can include siblings and grandparents.
When can a guarantor be released?
You can request the guarantor to be released once the Loan to Value Ratio (LVR) has dropped to 80% or under. This occurs when the property value has gone up, or you have built up equity in your loan as you continue to make the ongoing loan repayments, or both.
How can I request the guarantor to be released?
This will usually involve an internal refinance to be completed and the bank or your broker will organise the bank valuation of the property to ensure that your current loan is at 80% LVR or under.
Another option is, you can refinance to another lender and only provide the borrower’s property as security. During the mortgage discharge process with the current lender, the guarantor’s property will be removed.
Are guarantor loans limited to only owner occupier properties?
No, there are a few lenders that offer guarantor loans to Investors which will allow them to buy their investment property with a lower deposit and save thousands on LMI fees.
Are there any other low deposit home loan options available?
Absolutely! If you are a first home buyer there is an option that you may qualify under which is the Home Guarantee Scheme to help you get into the property market with a 5% deposit and to avoid paying LMI as well.
