As house prices continue to rise across the country, getting into a new home can be tricky for first home buyers. Fortunately, if you’re able to get the help of a guarantor, it might mean you can get into a home of your own sooner rather than later.
A guarantor is normally a close family member; in most people’s cases, that means their parents. By using a guarantor to get a home loan, you can potentially put down a lower deposit. However, it doesn’t necessarily mean you will be able to borrow more money.
In the case of a guarantor loan, a close family member puts up equity from their own property as a form of a deposit to help you to purchase a home. Most lenders require a home buyer to put down a 20% deposit to get a home loan. This reduces their risk in the event you’re unable to continue to pay off your home loan.
If you are unable to put down 20%, you can take out a higher LVR loan and pay Lender’s Mortgage Insurance (LMI). LMI is put in place to protect the lender and is a one-off, upfront premium.
The issue with LMI is that it is normally tens of thousands of dollars and can significantly reduce your ability to buy a home, especially if you were already struggling to come up with a deposit.
By using a guarantor, you’re effectively able to sidestep these two issues and use what deposit you have in conjunction with the equity in the home of a relative. Using the guarantor’s equity takes your deposit up to that 20% threshold that most lenders like to see.
The big misconception with guarantor loans is that you can borrow more money. That is generally not the case, as your ability to borrow money is based on your ability to service the loan, or your ‘serviceability’, as it’s called. Your serviceability is determined by your income and ongoing expenses.
In reality, if you are effectively borrowing 95-100% of the property value with the help of the guarantor, you are likely to be able to borrow less because your overall LVR is higher. However, if you’re struggling to come up with a 20% deposit, a guarantor loan is a great way to get into the property market and get a home of your own.