What are guarantor home loans?
Guarantor home loans are home loans in which the applicant has a guarantor who will take responsibility for mortgage repayments should the applicant default. A guarantor is typically a parent or close family member of the applicant.
Guarantor home loans are sometimes considered bad credit home loans, as they can help applicants who don’t have a good credit score.
Who offers guarantor home loans?
Guarantor home loans are offered by a limited number of lenders. Each of these lenders has its own unique criteria - such as who can and can’t be a guarantor - so check your eligibility before applying.
How much will a guarantor home loan cost me?
If you take out a $400,000 guarantor mortgage over 30 years with a $10 monthly fee, here’s how much you’d have to repay under different interest rate scenarios:
- 4.00 per cent = $1,920 per month, $691,078 in total
- 5.00 per cent = $2,157 per month, $776,623 in total
- 6.00 per cent = $2,408 per month, $866,953 in total
- 7.00 per cent = $2,671 per month, $961,636 in total
- 8.00 per cent = $2,945 per month, $1,060,221 in total
How do you compare guarantor home loans?
When comparing any loans, such as guarantor home loans or bad credit home loans, you should consider the interest rate, fees, features and repayment schedule.
Comparing guarantor mortgages can help you secure the best rate and choose the features that suit you.
When you compare loans, it’s best to pick a loan that you are confident in repaying so that you don’t default on your payments.
What are the benefits of guarantor home loans?
If you take out a guarantor home loan, you might be able to:
- Enter the market sooner
- Qualify for discounted interest rates
- Avoid paying lender's mortgage insurance (LMI)
- Buy a more expensive home
How can you improve your chances of being approved for a guarantor home loan?
To improve your chances of being approved for a guarantor home loan, check the lender’s eligibility criteria. Some lenders only allow a parent to be a guarantor, while others may have more relaxed rules. Choosing a guarantor who has good credit and a close personal relationship to you can help you secure a guarantor home loan.
Also, it’s important to explore ways to make yourself look like a more reliable (and therefore less risky) borrower. Here are five ways you might be able to achieve that goal:
- Increase your income - get a second job, work more hours, ask for a raise
- Reduce your spending - cut back on non-essentials like socialising, booze, clothes, holidays, taxis
- Increase your savings - sell unwanted items
- Boost your employment profile - stay in your job for longer, ask to move from casual or part-time to full-time
- Cut back on credit cards - lower your credit limit or even cut up your card
Who can act as a guarantor?
Most banks only allow parents to be guarantors for home loans. Some will consider guarantees from immediate family members like siblings, grandparents, spouses, de facto partners or adult children. Close friends and workmates are usually not accepted. If your guarantor is someone other than your parents, you may have to meet other lending conditions to qualify as a borrower.
How do you take out a guarantor home loan?
Taking out a guarantor home loan is a more time-consuming and complicated process than taking out an ordinary home loan.
With an ordinary home loan, only one party needs to provide proof of identity, income, savings and assets - but with a guarantor home loan, it’s two.
Also, the guarantor will have to provide a legal promise to pay off the mortgage in the event that the primary borrower fails to do so.
What are the pros and cons of guarantor home loans?
When guarantor home loans work well, they allow Australians with small deposits and/or bad credit to enter the property market ahead of schedule - and, possibly, qualify for cheaper interest rates and avoid paying lender’s mortgage insurance (LMI).
As part of this ideal scenario, the borrowers then make all their repayments on time, so that the lender never has to trigger the guarantee.
But not all guarantor home loans go according to plan. Some borrowers fail to make repayments - perhaps because they lose their job or get a divorce.
When that happens, the guarantor is expected to make the repayments. This might force parents to postpone their retirement, come out of retirement, sell the family home or some combination of these things.
That, in turn, might lead to a breakdown in the relationship between the borrower and the guarantor.
The point is that while guarantor home loans can have a big upside, they can also have serious consequences and so should never be entered into lightly.
What are some alternatives to guarantor home loans?
If you’re struggling to save up for a deposit or need a home loan with bad credit, there are alternatives to guarantor home loans. A parent-assisted home loan is one option. A parent-assisted mortgage resembles receiving a gifted deposit. With a parent-assisted mortgage, you will have to pay back this gift to your parents with interest.
Another option is to take out a high-LVR home loan - a mortgage with an LVR of 95 per cent or even 97 per cent.
Both of these options are potentially risky, so it’s best to get independent financial advice first.
Case study: Jennifer’s parents must pay
Jennifer and her partner wanted to buy their first home, and asked Jennifer’s parents to guarantee the loan. She assured them that repayments would be made on time, but a few months after securing the loan, Jennifer lost her job, her partner ended the relationship and both parties stopped making repayments. As such, Jennifer’s parents became responsible for the mortgage. Although they had agreed to act as a guarantor, the situation caused a high level of frustration and conflict between Jennifer and her parents.
What are guarantor loans called?
Different lenders use different names for their guarantor loans. Some examples include ‘Family Pledge’, ‘Family Equity’, ‘Family Support’, ‘Family Guarantee’ and ‘Fast Track’. This is something to be aware of during your research.
But whatever the name, they all translate into the same thing. These terms basically refer to security guarantee.
Beware, though, that there are differences between every lender’s credit guidelines, loan types and discounts for family guarantee loans. Doing your own homework can lead to savings.
Should I be a guarantor?
Becoming a guarantor is a major decision so it pays that you seek independent financial advice before you jump in. These questions must be answered:
* How big is the guarantee that you are committing yourself to? Can you cover the ongoing mortgage payments if the borrower folds?
* When will you be liable to cough up money? Usually, banks and other lenders will proceed if the mortgage is in arrears for three to six months.
* How credible is the person that you are acting as guarantor for? One has to be brutally honest in answering this, especially if it involves your own son or daughter.
Do I need expert advice if I’m a guarantor?
Being a home loan guarantor is a big commitment and you should seek expert advice from appropriate professionals.
It is desirable that before applying you have a preliminary discussion with your lawyer and then put the “guarantee and indemnity’ documents for legal scrutiny before signing on the dotted line.
One must also have an exit strategy in mind. For example, if the loan is for 25 years, you don't have to be involved for that period. Extra payments and refinancing can help remove the guarantee in two to five years.
The guarantor’s risk can also be minimised by their children if they procure insurance for their own mortgage so the guarantor’s property is protected.