One way to get a foot in the door could be to ask for financial assistance from your family. Almost half (49%) of parents surveyed by homeloans.com.au in 2018 said they had given cash to help their children or grandchildren buy a home.
So, what does it mean to have a parent or other person guarantee your home loan, and what does it involve?
What is a guarantor home loan?
A guarantor home loan allows parents, or someone else who’s close to you, to use the equity in their property as security for part or all of your mortgage. They could also ‘go guarantor’ by contributing cash to help you pay off the loan.
Typically, as the homebuyer you’ll still be the main person responsible for making the regular repayments on your mortgage (including any interest and fees), but if you fail to meet those repayments, the guarantor may become liable to cover them.
The person securing your home loan is known as the guarantor. Like a normal home loan, for a guarantor home loan you would borrow an amount from a bank and repay it, but the guarantor’s equity essentially acts as collateral should something go wrong, which means the bank could take possession of it if your guarantor also can’t meet the repayments.
Your guarantor may choose to only guarantee a portion of the loan, which would mean once you had repaid that portion of the loan, they would be free from any risk to their property should you miss any repayments further down the track.
Who can act as my guarantor?
Lenders generally require your guarantor to be an immediate family member, such as a parent or partner, but some may also allow others such as your sibling or a grandparent to go guarantor. Different banks often have different requirements of what makes someone eligible to be your guarantor, some of which can include having:
- A good credit score
- Equity in a property
- A stable income
How much can I borrow with a guarantor?
Some lenders may let you borrow up to or even above 100% of the value of the property you’re buying if you have a guarantor, but it really depends primarily on the lender, your financial standing as a potential borrower and the circumstances of your proposed guarantor or guarantors. Your lender may still consider whether it thinks you can afford to eventually repay the loan, and some banks may require you to save a certain amount towards the deposit even though you have a guarantor.
If you find you can be approved for a loan at the full value of the property, it’s worth taking a deep dive into your income and living expenses to ensure you have the capacity to repay the loan and have some wiggle room for any unexpected expenses.
It’s worth chatting with your guarantor about the loan amount and amount they are willing to guarantee in advance of entering any formal agreement.
What are some benefits of a guarantor home loan?
One of the main benefits of having a guarantor on your home loan is that it may help you avoid paying Lender’s Mortgage Insurance (LMI). This is typically a one-off fee paid by the borrower to the lender to protect the lender against financial loss should you be unable to meet your mortgage repayments. Lenders typically require borrowers to pay LMI on loans where the borrower has a deposit of less than 20% of the property’s value.
In the case of having someone go guarantor for you, however, the risk to the lender is already minimised by having the guarantor’s home as security. A guarantor can also help you secure funding from a bank if you don’t have enough saved for a deposit of that size, and can help reassure the bank that mortgage repayments will be covered if you can’t pay.
Other possible benefits of a guarantor home loan include:
- You may not have to save as much for a deposit
- It could strengthen your home loan application
- You could get into the property market faster and more easily
While there are clearly some benefits to going guarantor, given it’s such a large financial commitment, it’s also worth weighing up the potential risks.
What are some cons of a guarantor home loan?
The main risk associated with a guarantor home loan is for the guarantor, who is ultimately liable to cover mortgage repayments and fees if the borrower is unable to. Any parents, particularly those on the path to retirement, should carefully consider the decision to go guarantor as it could put hard-earned savings and retirement plans at risk.
Homeloans.com.au’s 2018 research found almost two in three parents and grandparents were making financial and personal sacrifices to help their children or grandchildren buy a home. Of those willing to provide financial assistance, more than one in four said they were prepared to retire later than planned.
ASIC also warns on its MoneySmart website that when requesting credit for themselves, your guarantor will need to tell lenders about any loans they’re guaranteeing, which could stop them from getting a new loan even if you’re still on track with your home loan repayments.
First home buyers who have received help from family or friends to pay for their home loan are more likely to experience cash flow problems, such as difficulty paying utility bills or meeting mortgage repayments, according to the RBA. The central bank found last year that more than 30% of people who needed help from their parents to pay for a deposit were in financial stress.
Some other potential cons of a guarantor home loan include:
- If you use a guarantor to avoid paying LMI rather than saving up a deposit yourself, the home loan could end up costing you more in the long run since you’ll be paying interest on a larger portion of the property’s value.
- Your relationship with your guarantor could be strained by such a serious financial commitment.
- You and your guarantor’s credit report could be negatively impacted if mortgage repayments can’t be met.
- Your parents may have to sell their home to repay your home loan, in a worst-case scenario.
Other ways your family could help you buy a house
If a guarantor home loan just doesn’t sound like the right option for you, but you still need a little help to get onto the property ladder, your family could help by:
- Paying some money towards your deposit as an informal loan that you can pay back to them over time, which may allow you to put down a 20% deposit and avoid paying LMI.
- Letting you move back home to cut down on expenses such as rent and bills, allowing you to put the savings towards a deposit.
- Co-signing a home loan with you, meaning you would both be responsible for the loan repayments but your parents wouldn’t have to put up their house as security. This could also be seen as an investment property of sorts, that your parents could potentially earn a profit from.
If you’re currently considering a home loan, the comparison table below displays some of the variable rate home loans on our database with links to lenders’ websites that are available for first home buyers. This table is sorted by Star Rating (highest to lowest), followed by comparison rate (lowest-highest). Products shown are principal and interest home loans available for a loan amount of $350K in NSW with an LVR of 80% of the property value.
Before committing to a particular home loan product, check upfront with your lender and read the applicable loan documentation to confirm whether the terms of the loan meet your needs and repayment capacity. Use Canstar’s home loan selector to view a wider range of home loan products.
*Comparison rate based on loan amount of $150,000 and a term of 25 years. Read the Comparison Rate Warning
Other guarantor options: What is the First Home Loan Deposit Scheme?
According to research from the Grattan Institute, home ownership rates are falling in Australia, particularly among young people and low-income households, and it’s becoming increasingly difficult to save up a home loan deposit. The Morrison Government recently announced a plan to address these issues via its First Home Loan Deposit Scheme.
The scheme would allow some borrowers to buy a house with a deposit as low as 5%. It is set to start on 1 January, 2020 and will effectively guarantee part of an eligible first home buyer’s deposit. It would guarantee up to 15% of the purchase price for scheme participants who have already saved at least 5% towards the deposit. It is also hoped to reduce the amount borrowers would have to pay on Lender’s Mortgage Insurance (LMI), which is sometimes charged to borrowers who have deposits of less than 20%.
Capped at only 10,000 loans each year, the effectiveness of the scheme’s ability to increase home ownership rates has been debated by researchers. According to the Australian Bureau of Statistics (ABS), there were close to 8,500 first home buyers in January 2019 alone.