Moving into your first home can be hard and not to mention expensive. However, you don’t have to do it alone. Like any challenges in our life, asking help from family is the best way to do it. If you’re struggling to save up of a home deposit, consider asking your family for help.
Asking help for your family isn’t to be frowned upon. In fact, getting a loved one to help you out is a common way to purchase your first home. You can consider it as a gift. Have a conversation with your family and make arrangements for the gift. Then, explain these to your lender. You’d be surprised how much your family want to be a part of an important milestone of your life, buying your first home.
What is a family guarantor?
A family guarantor is a person who serves as the additional security for your home loan. Most lenders prefer the guarantor to be the borrower’s close relative, usually a parent.
Family Guarantee loans reduce your loan to value ratio which can reduce or avoid the need for you to pay Lender’s Mortgage Insurance. This can help you save a significant amount of money and you can get into your new home faster.
What are the advantages of a Family Guarantee Loan?
A family guarantee loan offers more benefits other than helping you get into your new home sooner by reducing or avoiding Lenders Mortgage Insurance without having a big deposit. It can also help you with the following:
- Maximising the amount you can borrow so you can get into your new home faster.
- Save money. Getting a family guarantee doesn’t cost any extra
- Releasing the guarantee when the guarantor requests this once you’ve reduced the loan amount secured by the guarantee– your family member won’t be liable forever!
Who can be a guarantor?
Generally, a guarantor is limited to the borrower’s immediate family members. Normally, this would be a parent but guarantors can be your siblings or your grandparents. There are some lenders that allow extended family members, and even ex-spouses to be your loan guarantor. This varies depending on the lender.
How can a family guarantor help your loan application?
If you’re looking for a way to get into your first home or your new home without the deposit, there’s another way. You just need to have the ability to make the required home loan repayments and a family guarantor. They could help you secure additional funds to buy a home loan.
For renters, saving a deposit can be hard. Having a family guarantor can help them borrow the full purchase price and sometimes even the costs associated with purchasing property. This varies from lenders to lenders, some will demand that you need to contribute some of your own equity towards the purchase, even if you have a guarantor.
Having a guarantor can also help you avoid the thousands of dollars cost of Lenders Mortgage Insurance. Typically, LMI is required for home loans where you have less than 20% deposit i.e. the loan is greater than 80% of the value property. It is a type of insurance which lenders take out to cover the additional risk of high Loan to Value Ratio (LVR) lending.
There are different lending policies on each lender. So, the amount of the guarantee varies from lender to lender. The guarantee can be the full loan amount or as low as 20% of the loan (where the loan is for 100% of the purchase price).
After you’ve built up equity in your property, your guarantor can be released from the loan. The timeframe to do so depends on the original deposit the number of extra repayments made and whether your property has appreciated in value over the time period.
Your lender may require you to pay some additional fees to release your guarantor. This fee can cover the fee for the lender to revalue the primary security property as well as lender discharge fees.
Guarantor loan requirements
To qualify for Family guarantee home loan, you will need to have a family member willing to sign as your guarantor. The guarantor needs to be a homeowner because their house’s equity forms part of security for your first home loan.
Being a guarantor is a big decision. If you fail to oblige on your loan responsibilities, the lender can ask the guarantor to pay off your home loan.
That’s why anyone who is planning to be a guarantor for a home loan should seek independent legal and financial advice before accepting the responsibility. Most lenders will require you to do so, before accepting a guarantee.
Risk for Guarantors
It is important to understand that there are risks associated with being a guarantor on a loan application. Essentially, the guarantor is liable for the amount specified in the family guarantee.
If the borrower does not repay the loan, the borrower’s property will be sold to recoup the funds outstanding. If the sale of the property does not cover the full amount of the primary loan and the guaranteed amount, the guarantors will be responsible for the guaranteed amount. In certain circumstances, the guarantor’s property can be sold to recoup the guaranteed amount outstanding.
The guarantors will need to fully understand the full terms of the guarantee. All lenders suggest that guarantors seek independent legal advice before deciding on being guarantor, and some lenders require guarantors seek independent legal advice before deciding on being a guarantor.