When it comes to buying a home, saving a deposit can be difficult and it can take a long time. Adding a Guarantor to your home loan, means you can buy with a small deposit, or in some cases, no deposit at all.
Lenders have two key requirements for you to meet:
What is a Guarantor, and what types of Guarantor loans are there?
A person, or people, that provide a guarantee to assist applicant(s) in security for a home loan.
Lenders currently offer Guarantor home loans with a Security Guarantee.
What is a home loan deposit? How much do I need?
Lenders seek a 20% deposit, so that your Loan to Value Ratio (LVR) is 80% or less. The 20% deposit reduces the risk and ‘exposure’ to the lender, if applicants fail to make repayments, and the lender needs to sell the property to close the loan. When the bank is forced to sell the property, there are costs associated with the sale (real estate agent etc), and the market price for the property may have fallen since it was purchased. The 20% deposit, covers any potential shortfall and protects the bank from a loss.
If you have a LVR above 80%, the lender will require you to pay the one-off premium for a Lenders Mortgage Insurance policy which protects the lender from you defaulting. There are online calculators that allow you to estimate the price of LMI, which ranges depending on lender and the LVR.
Can I get a home loan with a small or no deposit?
Yes, there are several ways to purchase a property with little, or no deposit.
Keep in mind, closing costs on a property often add 7-11% on the sales price, and must be factored into total borrowing and deposit calculations.
What is a Security Guarantee?
A security is an asset of value, that the Guarantor promises to make available to the lender, should the loan applicant fail to meet their obligations to repay the loan.
The security is usually property or cash, and replaces or minimises the need for the loan applicant to provide a deposit.
How does the Security Guarantee work?
Most commonly, parents are a Guarantor to their children who are first-home buyers.
A Guarantor is not on the loan application, but assists by offering a ‘security’ in helping the loan applicant(s) get finance.
Let’s say you wanted to buy an $800,000 house, but only had a 5% deposit of $40,000, this means you would have a 95% LVR. A lender would require you to pay Lenders Mortgage Insurance (LMI) which would be a one-off cost of about $41,000. LMI can be added onto your loan amount, but it’s a huge cost considering that in this example, it’s about equal to your entire deposit savings!
To get the LVR down to 80% (where LMI is no longer required by the lender), you would need an additional $120,000 deposit, which brings the total 20% deposit to $160,000. If your parents aren’t willing to gift you $120,000, then they can become a Guarantor on the loan.
If they’ve paid off, or close to paying off their own house, your parents would easily have $120,000 of equity in their home. Equity is the difference between the market value of their home, and any outstanding loan.
Your parents don’t transfer any cash, or help you pay the loan, but are providing a ‘security’ (their own home), for the amount of deposit that you lack, to get you down to an 80% LVR.
Note, that the Security Guarantee is not decreasing the loan amount, because the $120,000 is not a deposit against your loan – it’s an asset that is elsewhere.
You will be making home loan repayments on $760,000, as your $40,000 is a deposit.
What types of Security can be used?
Note, the guarantor can offer different forms of security, such as:
The Guarantor doesn’t need to liquidate (sell) these assets to create a security. You can think of the guarantee as being “on paper only”.
With property, there needs to be sufficient equity (the difference between the market value and any remaining loan) to cover the security. If there is finance on the parents property still, a ‘second mortgage’ will be added.
The Guarantor may also be financially assessed to ensure you’re not placing them in a highly risky position.
How long does the Security need to be maintained?
The guarantee is in place for the duration of the home loan, which is typically 30 years.
This means that any form of security the guarantor has provided must stay in their possession until the lender agrees to remove the guarantor condition. For example, the parents place of resident or their investment property couldn’t be sold until the guarantee is removed.
Typically, the lender will require that a cash security be transferred into a term deposit in the lenders control. That term deposit would need to remain active until the guarantee is removed.
What is an Income Guarantee? Can a Guarantor help borrowing capacity?
Lenders typically no longer offer Guarantor Income Guarantees.
Borrowing capacity is about the applicant’s ability to make repayments based upon their personal income and expenses. The lender does not want applicants to have loans they’re unable to repay. There are laws in Australia that control how lenders assess borrows, so that they’re not offered ‘too much’ debt.
For your understanding, the purpose was to inflate the borrowing capacity of the applicant, by the guarantor agreeing to help the applicant make regular payments on the home loan.
For example, first-home buyers could ask their parents to actively help them pay for the home loan. Essentially, the bank would assess the parents spare cashflow and increase the amount the first home buyers could borrow, based on this guarantee.
In practice, parents wouldn’t actually help make the payments, so borrowers would be paying too much and failing to make repayments.
Should I use a Guarantor?
For many applicants, especially first-home buyers, a Guarantor is a brilliant way of entering into the property market sooner.
If you are confident in your capacity to repay the loan, the Guarantor isn’t taking on too much risk, and it can benefit the applicant immensely.
When can the Guarantor be released?
In practice, most applicants are able to discharge (remove) the guarantor in 5-7 years. This is highly dependant on a number of personal and macro-economic factors. Here’s a few common ways to remove the Guarantor:
When the LVR is 80% of less, there is no need for the Guarantor. You will pay no LMI, and will probably also enjoy a lower interest rate.
The Guarantor should get their own independent legal advice.
What is a limited guarantee?
Often, the lender does not expect the Guarantor to guarantee the entire loan, only a certain portion. For example:
The loan applicant is liable for their $800,000 share, and the guarantor only their $200,000 share. The Guarantor isn’t ‘on the hook’ for the entire loan in this scenario, which might make them more likely to become a Guarantor. In other words, the most the bank can ‘come after’ the Guarantor for, is $200,000.
There may be a small buffer added to the Guarantor’s requirement, so check this.
Can anyone be my Guarantor?
Typically, lenders will want it to be a parent. Sometimes they will allow a sibling or aunty or uncle.
How much can I borrow with a Guarantor Mortgage?
Borrowing capacity is based upon the applicant’s ability to pay back the loan. This is determined by their applicant(s) income, expenses, and interest rates.
Having a Guarantor on the mortgage does not affect (increase or decrease) borrowing capacity. A Guarantor is only helpful in reducing the cash deposit requirements from the applicant.
Speak with a mortgage broker or lender to understand how much you can borrow.
What are the risks to being a Guarantor?
Becoming a Guarantor for your loved ones can be a wonderful gift, however you should fully understand the risks.
The Guarantor is liable to make payments on the home loan is the applicant fails to do so.
If the applicant continues not pay mortgage payments, the lender would eventually foreclose (sell) the property that the loan is against. Through the sale, if the lender is unable to receive enough funds to repay the entire loan amount, the lender will require the Guarantor to pay the shortfall.
Typically, the Guarantor is given the option to simply pay, but they’re unable to provide these funds in a worst-case scenario, the lender has the legal power to sell the Guarantor’s asset (property etc) to recoup the shortfall. This would be a long, complex process with lawyers involved.
Additionally, the Guarantors ability to borrow money will often be reduced because their equity or asset is now tied to a lender.
Does a home loan with Guarantor cost more?
Guarantor home loans are common and most lenders offer them without additional fees, or higher interest rates.
Use a mortgage broker to compare different Guarantor home loans among many lenders, and compare the fees and interest rates you have access to.
What situations can’t I use a Guarantor?
Typically, lenders limit the use of a Guarantor to first-homes. They do not like to use this process for:
Using a Guarantor may seem complex, however it’s a very common practice and is highly recommended to people with a low deposit.
On a $1,000,000 property, a buyer with a $50,000 deposit (5% deposit = 95% LVR), the Lenders Mortgage Insurance would cost approximately $39,000.
A Guarantor would save this buyer $39,000, so you can see why that might be of interest!
Meet Jason Williams, your dedicated and independent Buyers Agent in Adelaide.
Jason is your go-to-guide for the sometimes frustrating, but always exhilarating journey of securing your dream home or next investment property. Whether you’re a first-time or seasoned buyer, Jason understands the complexity, risks and pitfalls of property and diligently protects his clients, with their best interests always at heart.
Whether you're a first-time homebuyer or a seasoned investor, one essential step to take before you start seriously house hunting is to get a home loan pre-approval. This crucial process offers numerous benefits that can simplify your home-buying journey. In this article, we'll explore ten compelling reasons why getting a home loan pre-approval should be at the top of your priority list.
A home loan pre-approval, also known as conditional approval, is a formal indication from a lender that you are eligible to borrow a certain amount of money to purchase a property. It provides you with a clear budget and allows you to confidently search for properties within your price range. While pre-approval is not a guarantee of finance, it gives you a significant advantage in the home-buying process.
There is a vast difference in the power and relevance of a system-generated pre-approval and a fully assessed pre-approval by an actual loan officer. Chat with your Buyers Agent or Mortgage Broker about the difference between these two. System-generated pre-approvals are practically useless and shouldn’t be relied upon, especially if finances are tight.
In summary, obtaining a home loan pre-approval is a wise and strategic move for anyone looking to buy a property. It empowers you with crucial information about your budget, allows you to negotiate more effectively, and saves you time and energy throughout the home-buying process. Additionally, it can help you secure a better interest rate, make informed decisions about your financing, and ultimately lead to a smoother, less stressful home-buying experience.
If you're considering purchasing a home, don't underestimate the importance of a home loan pre-approval. It's a proactive step that will not only simplify the process but also provide you with a sense of control and confidence as you embark on your journey to homeownership.
We help all types of Adelaide home buyers through their property purchase journey. It's a good idea to consider the services of an Adelaide Buyers Agent such as Navigate Buyers Agency, when you're in the initial phases of planning your purchase.
Purchasing a home is a big deal, and it can be a bit overwhelming. The last thing you want is to make costly mistakes that can haunt you in the future.
As Buyer’s Agents, it’s our job to help our clients avoid mistakes on their homebuying journey.
Here’s a list of 25 avoidable mistakes that buyers can make:
So there you have it, a comprehensive guide to avoiding the most common mistakes when buying a home. Remember, it's a journey, not a sprint. Take your time, do your homework, and you'll be on your way to home sweet home!
It is common for buyers to be surprised by the number of costs to buy a house. Often these amount to an additional 5-10% of the purchase price of the home.
Therefore, it’s important you’re aware of them from the outset. Some costs can be added onto a home loan (assuming you have the borrowing capacity), whilst others will need to be paid upfront, which reduces the home deposit you have saved.
Here’s a list of costs to expect when buying a house, some of which may not apply to you:
During the search:
At settlement:
Finance:
Moving in:
This is a comprehensive list, so not all the costs above will necessarily apply to your situation. It’s best to work closely with a Buyer’s Agent, mortgage broker and conveyancer to understand what costs you might need to pay. You can learn more about what services a Buyers Agent offers here.
Let’s say you’re targeting an 80% loan-to-value ratio, so that you avoid paying lenders mortgage insurance. Did you know that you actually need 20% of the property price, plus 100% of the money required to pay all other closing costs, such as stamp duty, transfer fees and your conveyancer. For example, on a $1,000,000 purchase price, a 20% deposit would be $200,000, but then you’ll need an extra $60,000 minimum to pay closing costs.
On top of the costs listed above, you’ll then have home loan repayments due on a regular basis.
If you’ve only ever rented before, it’s particularly important that you calculate the cashflow required to purchase and keep the property, as it can often far exceed your typically rent payment.
If you need assist with your next purchase, get in touch with us, your dedicated Adelaide Buyers Agent.
This article is published by Navigate Buyers Agency for informational purposes only and is not considered legal, financial, investment or property purchase advice on any subject matter. By reading and re-publishing the blog, you acknowledge that there is no buyers agent-client relationship between you and Navigate Buyers Agency. The blog should not be used as a substitute for legal, financial, investment or property purchase advice from a registered practitioner who specialises in the area and you are urged to consult us or seek your own independent advice on any specific issue or matter.
Suggestions given, or inferences made are general only and have not taken into account your objectives, financial situation or needs. You should assess the suitability of any purchase of land or a business, in light of your own needs and circumstances, by seeking independent financial and legal advice.
