Before you read this post consider that there may be current government incentives and grants that can help get into home ownership sooner. Your mortgage broker is the best person to talk to about what you may be eligible for. If you'd like to connect to Catherine, our home loan broker who specialises in helping you get the best loan for buying land and building visit https://buildinoz.com.au/building-construction-home-loans/
How Guarantor Loans Help First Home Buyers
The easiest way around the deposit dilemma is to garner the support of your parents or close family members who already have considerable equity in their own homes, and are willing to support you by ‘guaranteeing’ your loan. In other words, you need someone to ‘go guarantor’ for you. Essentially, a guarantor is a close family relative, usually your parent/s, who has either paid off their own home or has a significant amount of equity in it. They must be willing to put that home up as security against your loan, and agree to cover your loan repayments if you default.
Most lenders offer guarantor loan products for first home buyers, although they go by different names, depending on the financial institution. Terms you might hear that refer to these types of arrangements include:
- Family Pledge
- Family Support
- Family Equity
- Fast Track
- Family Guarantee
Guarantor loans have many benefits for the borrower:
- You can get into the housing market more quickly
- You can borrow the money to cover your deposit if you don’t have enough savings
- You can borrow 100 per cent of the cost of the purchase
- You can avoid LMI, which can be significant
The main risk for the borrower is that they may be enabled by the guarantor to take on a larger debt than they can really afford.
The guarantor, however, faces a number of risks:
- They agree to put up all or part of the equity they have in their own home as security for the borrower.
- They may have to cover loan repayments if the borrower’s circumstances change.
- They may need the money back for an unseen change in their circumstances before the borrower is able to repay the funds.
While going guarantor can be risky, there are ways to minimise the risk. The amount of equity offered as security doesn’t have to be 100 per cent. It can be limited to an amount that equals the deposit required by the bank. This means that you can go ahead and borrow at ninety-five per cent LVR or less, and the guarantor’s security arrangement covers the other five per cent or more. Once you have repaid an amount equal to the guarantee, the guarantor can be released from their obligation to cover your payments, pending approval from the lender.
Another downside of applying for a guarantor loan is that the approval process can be quite lengthy. The lender will need to assess the value of the security being offered and the financial status of the guarantor.
Explore creative pathways to home ownership. Consider if there is someone close to you who would consider entering into a legally binding agreement that enables them to effectively function as your bank for part or whole of your required funds.
Instead of thinking outside the box, get rid of the box
- Deepak Chopra
This information is of the nature of general comment only, and does not represent professional advice nor should it be substituted for professional advice. Whilst attempts have been made to ensure the accuracy of the information, we don't guarantee it's accuracy. Any information we provide is not intended to provide specific guidance for particular circumstances and it should not be relied on as the basis for any decision to take action or not take action on any matter which it covers. You should always obtain professional advice before making any decision to purchase property of any kind. We recommend you seek professional financial advice prior to entering into a contract of any kind. Build In Oz disclaims all responsibility and liability to any person, arising directly or indirectly from any person taking or not taking action based on the information in this course. Please refer to our privacy and disclosure statement for further information.