Several Australians think acquiring a home is becoming increasingly difficult nowadays, with high deposit and fee charges. However, you are not alone. Many people like you want to buy their first home but cannot afford these costs. Guarantor home loans can be a one-stop solution for this.
Unlike traditional home loans, you do not have to bear all the deposit costs alone, you can have a guarantor for that. But how can this concept help you buy your first home, and what are the risks? All such questions may be troubling you. So, this blog will provide an overall guide to you.
Why Should You Choose Guarantor Home Loans?
Guarantor home loans are ones in which the borrower can take a loan without bearing full responsibility to repay it. This is because they involve a guarantor who can provide a loan guarantee on the borrower’s behalf. These guarantors mainly include your family members, like your parents, siblings, or grandparents. They can offer their home equity as security for your home loan.
Not anyone can use these types of loans, but rather, first-home buyers mainly use them to enter the property market. They can buy their first home with a low deposit while having their closest family member as their guarantor.
Further, some home buyers can also use guarantor home loans to avoid LMI (lender mortgage insurance). To borrow, they typically have to pay a 20% down payment but with this home loan, they reduce the amount by making a family member, the guarantor. However, you must know about its eligibility criteria before applying for this loan.
Eligibility Criteria of Guarantor Home Loans
To take advantage of the guarantor’s home loan, both the borrower and the guarantor must fulfil the following eligibility criteria:
For Borrowers
- A borrower must be a citizen or a resident of Australia.
- Age must be at least 18 years or above.
- Must have stable income and employment with proof of income and a good credit history
- The desirable property must be residential and not commercial or co-living.
- The borrowing limit can be 100% to 110% of property value.
For Guarantor
- The guarantor must be the closest family member of the borrower.
- The Age should be 18 years or above
- Must own sufficient home equity to cover loan requirements
- The guarantor’s home must be residential and not commercial.
- The property must have at least 20% equity to cover the guaranteed loan portion.
- The guarantor must have a good credit history and financial stability.
Additionally, you can also apply for the FHOG scheme (First Home Owner Grant) and stamp duty concessions. This can help further reduce your expenses while buying your first home.
Further, if you are not a first-time homebuyer, you must not have owned real property in Australia in the past 10 years. Since you know the eligibility criteria, you may be interested in knowing how guarantor home loans work and what process you need to undergo.
Stepwise Procedure of Guarantor Home Loans
So, guarantor home loans follow a stepwise procedure that you need to comply with, like:
- Select a Guarantor: In this, firstly, you need to select the guarantor who can provide security to the home loan. However, make sure that the closest relative with enough equity is your guarantor, usually a parent, grandparent, or sibling.
- Apply for a home loan: After selecting a suitable guarantor, you can apply for a home loan, confirming all the criteria. Also, mention the name of the guarantor who will be involved in the loan process.
- Undergo property valuation: Then, the property of the guarantor will be evaluated for equity. This will be used as collateral against your home loan and to secure the deposit amount.
- Wait for approval and settlement: Once the property is evaluated, the process of approval and settlement will take place. This process will involve the evaluation of your guarantor’s property to secure the guaranteed portion of the loan.
After this whole process, you can benefit from getting a guarantor home loan. However, you need to understand when and how to release a guarantor from a home loan.
Criteria for Releasing the Guarantor From Home Loan
Deciding when to release the guarantor requires thoughtful considerations such that you would not be able to use his or her collateral against your home loan afterwards. By the way, your guarantor will be released following a set of criteria. For example, if your LVR (loan-to-value ratio) is 80% and you have paid 20% or more of your home loan, then the guarantor can be released.
However, some lenders consider your LVR to be 85% or more, especially for accountants, doctors, and any other professionals. Once you reach this LVR, the lender will release your guarantor. This is because LVR indicates that you have developed sufficient equity, and now you do not need a guarantor to support your home loan.
Meanwhile, if your LVR is higher than the 80% limit, then you may need to pay LMI fees to cover the risk associated with your home loan. In addition to various benefits, this loan also involves certain risks for both a guarantor and a home buyer.
Potential Risks With A Guarantor And A Home Buyer
For Guarantor
- Financial risk: There may be a chance that the homeowner who has taken a loan is unable to repay it. Then, at this time, the guarantor needs to repay the guaranteed portion subject to his financial stability.
- Property at risk: In addition to the financial risk, guarantor property, which is used for collateral, is also at risk. For example, if the borrower cannot repay a loan, the lender or bank can take possession of the guarantor’s property for that amount.
- Impact on a credit score: Your credit score can also be at risk in case the borrower fails to repay a loan. As a result, it can limit your borrowing limit in the future and create a risk to your financial commitments.
- Legal Complexities: Guarantor home loans come with complex legal obligations that mean, in case of the borrower’s default, you may need to bear with them.
- Impact on emotional and relationship states: Since guarantors are usually friends and family members, it can impact your emotions and relationship with the borrower.
For A Home Buyer
Not all the risks are for the guarantor but rather, a borrower also needs to bear certain risks:
- Increased debt risk: As borrowers can take loans up to 100% or even 110% of the property value, borrowers take a high amount of loan. However, this can increase their debt, which subsequently impacts their borrowing capacity.
- Negative equity risk: Your property value may fall below the outstanding loan balance, subject to market fluctuations. This can make it difficult for you to apply for refinance loans, and even you cannot sell your property.
- Limited Refinancing Options: With a guarantor home loan, you can only have limited refinancing options until your guarantor is released. As a result, you cannot switch to better loan options to control your equity.
- Property at risk: In case you and your guarantor are unable to repay the loan, then your purchased property can also be at risk of repaying the loan amount.
- LMI risk: If your guarantor is released early because of reaching LMI at 80% or more, then you may need to pay LMI, which is a non-refundable expense.
In addition to these risks, both parties may lose their financial freedom until the loan is repaid. This is because a guarantor’s home loan requires a long-term financial commitment, which limits both parties’ borrowing capacity. Thus, before applying for these types of loans, both have to consider certain things.
Key Considerations For Guarantor Home Loans
For Borrowers
- Apply within the borrowing limit: Guarantor home loans allow borrowing up to 100% or 110%, but beyond this limit, the borrower needs to bear the risk. Therefore, borrowers need to make sure that they apply within this borrowing limit. They can use the home loan calculator to check the affordability and monthly repayments.
- Aim for Less LVR: If the borrower’s LVR ratio reaches 80% or beyond, they become eligible to pay for LMI. So, the borrower should aim for less LVR to avoid LMI in the future. You can also make extra repayments or use an offset account to build equity quickly.
- Planned release of guarantor: You can avoid the risk of LMI and negative equity by considering all the things before releasing your guarantor. This will improve the safety of your finances while maintaining your long-term loan commitment, too.
- Regular credit score check: The borrowers should regularly check their credit scores so that they do not fall while repaying the loan. Additionally, the borrowers can set automatic payments to avoid missing any repayment.
- Wise property selection: Select only that property that can offer stable or growing outcomes in the long run. This will help you save from negative equity risk. Meanwhile, also make sure not to borrow on the full purchase price of the property, confirming your financial condition.
For Guarantors
- Choose the limited guarantee option: You can avoid repossession of your property as a guarantor if you choose the limited guarantee option. This will limit your responsibility to repay only a specific portion of the loan and not the whole amount.
- Check the impact on borrowing capacity: Before becoming the guarantor, check how the borrowed amount will impact your borrowing capacity. This will help you to plan for your financial needs, such as home renovation.
- Confirming the amount of equity: Also, confirm the amount of equity needed for the loan. This will prevent you from giving a guarantee for a huge amount more than needed and limit your borrowing capacity.
- Confirm the deal with the written agreement: Since giving a guarantee on behalf of the borrower involves several risks, confirm the deal through a written agreement. This written agreement should disclose clear responsibilities and a repayment plan for both parties.
- Emergency funding: These types of home loans often involve several uncertain situations where you need to bear the responsibility. Therefore, you should plan for emergency funding, which will act as a backup plan to meet any uncertainty.
Collectively, both parties should consult a mortgage professional to gain a thorough understanding of associated risks. This will help them save the best home loan without affecting future financial commitments. You can consult Nfinity Financials. We will help you get your loan approved quicker and safer. To know more, contact us at Nfinity Financials or give us a call at 1300 GET LOAN or 0456 456 267.
