Saving up a deposit for a home loan can be difficult, especially if you are a middle to low income earner. This is when having a guarantor can give your home loan application the head start it needs.
What is a guarantor?
A guarantor is a third party to a home loan, supporting you to get a loan by offering additional security support. A guarantor is usually an immediate family member, such as a parent, sibling or grandparents.
The guarantor allows a portion of equity in their property to be used as additional security for the borrower’s loan application and provides less risk to the potential lender.
Benefits of a guarantor
- Deposit – If you have the ability to repay the loan but don’t have enough deposit, a guarantor could help you get the additional funds you need to buy a home; meaning you can borrow up to 100% of the purchase price and possibly the extra fees, such as solicitor fees, stamp duty etc.
- LMI – You can avoid paying Lenders Mortgage Insurance (LMI). LMI is usually required when you are borrowing more than 80% of the purchase price.
- Equity – After you have built up equity in your property, you can remove your guarantor from the loan. The timeframe to achieve this varies depending on the original deposit, the number of extra repayments made and whether your property has appreciated in value.
First home buyers are utilising a family member as a guarantor on their home loan due to the rising costs of living and the forever increase in rent is finding it difficult to save a deposit. A deposit for a home is at minimum 5% of the purchase price plus additional costs or 20% to avoid Lenders Mortgage Insurance.