If you’re looking to get into the market but struggling to save the full 20% deposit, you can ask someone to be a guarantor on your home loan.
A guarantor is a third party, typically a parent who agrees to repay a loan if you can’t; this includes any additional fees, charges and interest.
Offering additional security as support, a guarantor makes it more accessible for first home buyers to take their first step on the property ladder.
However, using a guarantor to purchase a home does not come without risks.
Let’s have a closer look at some of the pro’s and con’s, as well as some other factors to consider before using a guarantor to purchase a home.
What are the pros and cons?
Get into the property market sooner
Saving for a deposit and the additional costs that come with buying a property can be hard work. Having a guarantor allows for those who can’t save enough for a minimum deposit to e approved for a loan and crack into the property market sooner rather than later.
Save money on mortgage insurance fees
Despite using a lower deposit amount, you are still able to steer clear of paying the cost of mortgage insurance fees. This can save you several thousands of dollars when purchasing your first property.
Guarantors can be removed down the track
You can remove the guarantor in the future under certain circumstances. Scroll down below to find out when you can remove your guarantor.
Allows access to better interest rates and properties
A guarantor allows you to borrow less from the lender but still have security on your loan. Therefore, you may be eligible for better interest rates, and you will have more choice in properties than if you had gone in on the loan by yourself.
The risk for your guarantor
If you fail to meet your loan repayment, the guarantor is liable and will be held accountable for the debt that they have guaranteed. This puts the guarantor’s own financial security at risk.
Taking out a loan you can’t afford
You may be more inclined to take out a loan you can’t afford when you haven’t saved the full deposit and the sole responsibility doesn’t lie entirely on you. This may increase the likelihood of defaulting on your loan and therefore jeopardising your credit rating.
Breakdown of relationship
Financial matters can become tedious on families and your relationship with your guarantor may become strained if you are unable to meet your repayments.
When can you remove a guarantor?
If you are satisfied that you can afford the mortgage repayments without any assistance and have gained enough equity on your property, some lenders will allow you to release the guarantor from their obligations by removing them from your home loan.
When removing the guarantor, the lender will consider your Loan to Value ratio – often known as LVR – to determine the next steps. The LVR is the percentage of your remaining loan against the value of your property.
Generally, if your LVR is at a maximum of 90%, you will able to remove the guarantor from the loan but you will have to pay for the cost of Lenders Mortgage Insurance. However, if your LVR is at 80% or lower, you will be able to remove the guarantor from the loan and avoid paying the cost of the Lenders Mortgage Insurance. Some fees and charges may apply.
What are the risks for a guarantor?
If you are considering using a guarantor for your first home purchase, it is important that both parties consider the risks involved before making the agreement.
If you were to default on your loan, the guarantor becomes responsible for paying their debt whether it be to continue with the repayment schedule or the full repayment of the loan amount. If the guarantor is unable to make the full repayment, the house may be put to auction, and if the sale is lower than the outstanding debt due to fluctuations in the property market, the guarantor will need to repay the outstanding amount. Furthermore, the guarantor may have to put their assets against the loan to pay off the loan.
As a result, the guarantor faces many risks to their own financial future including:
- Borrowing power for other loans reduced
- Potential credit rating damage
- Loss of assets
Please note, the information contained in this blog relates to a security guarantor, not a service guarantor. A servicing guarantee can be used when a guarantor is willing to agree to provide help to the borrower with meeting their regular repayments.
Whether you’re a first home buyer or need information about using a guarantor, the experts at Inovayt Finance will help you make the right decision. Book a free meeting today to discuss how you can best prepare for your home purchase.