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What are guaranteed home loans?
A guaranteed home loan is a mortgage in which a ‘guarantor’ promises to make the repayments if the borrower fails to do so. As a general rule, the guarantor will have a good credit history and will have to put up their home as a form of security.
Guarantor mortgages are a helpful option for applicants who can’t secure a regular loan, because of one or several of these reasons:
- Haven’t saved a large enough deposit
- Don’t have a large enough income
- Don’t have a reliable employment history
- Have a bad credit history
Guarantors are often the applicant’s parents. However, some lenders will also accept siblings and grandparents as guarantors.
Successful applicants who need to borrow more than 80 per cent of a home’s value might want to consider a guarantor to help cover the 20 per cent deposit to avoid costly lender’s mortgage insurance (LMI) payments. The borrower can then take on the remaining 80 per cent of the loan without a guarantor.
Who offers guaranteed home loans?
Many banks, credit unions, building societies and non-bank lenders offer guaranteed home loans as this gives them added security on the loan.
Home loan lenders have a range of eligibility criteria for a loan. Having a low income does not automatically disqualify an applicant. Additionally, home loans for bad credit are possible for a borrower who secures a guarantor.
Guarantor loans are a helpful option for Australians looking to buy their first home, and there are many lenders willing to assist. Still, it is harder to get a guaranteed home loan than a regular home loan.
How do you compare guaranteed home loans?
Using RateCity’s home loans comparison tool, here are some of the things borrowers should consider when applying for a guaranteed home loan:
- Advertised interest rate – this is the interest rate that will be charged on the loan, and will be either variable or fixed
- Comparison rate – this rate gives a more realistic picture of the true cost of the loan as it combines the advertised interest rate with most fees
- Monthly repayment – how much the borrower is expected to pay per month
- Total repayments – how much the borrower can expect to pay over the life of the loan
- Minimum deposit – the percentage of the purchase price that the borrower needs to provide to qualify for a home loan
- Loan term – the amount of time the borrower has to repay the loan
- Loan fees – the upfront and ongoing fees that the borrower must pay during the life of the loan
How can you improve your chances of being approved for guaranteed home loans?
Borrowers can improve their chances of being approved for guaranteed home loans by demonstrating to the lender that they are a ‘safe bet’.
The more risky a loan application seems, the less likely it will be approved by a lender, so borrowers should aim to make themselves look as responsible as possible.
Here are six ways to improve your chance of being approved for a mortgage:
- A higher deposit is better than a lower deposit
- A higher income is better than a lower income
- A higher savings rate is better than a lower savings rate
- A longer tenure in your current job is better than a shorter tenure
- A good credit history is better than a bad credit history
- A lower credit limit on your credit cards is better than a higher credit limit
Any steps you can take to improve in some or all of those categories will help your chances of qualifying for a guaranteed home loan.
Another way to improve your chances is to pick the best possible guarantor. The guarantor will be required to pay the home loan if you default, so the lender will also need to be convinced that they are a responsible party.
Lenders will look more favourably on a guarantor with a stronger financial position and a better credit history that a guarantor with a weaker financial position and a worse credit history.
Mary and Luke are in the early stages of their careers after graduating from university. They have found their ideal first home, but don’t meet the financial requirements needed to qualify for a standard mortgage.
Mary’s parents agree to help them as a guarantor, which allows them to successfully apply for a loan for a property valued at $750,000. They put down a deposit of 5 per cent ($37,500) and borrow the remaining 95 per cent of the value of the property.
Thanks to their guarantors, Mary and Luke aren’t asked to pay lender’s mortgage insurance (LMI) on their loan, saving them about $21,000.
How do you take out guaranteed home loans?
Borrowers can apply for a guaranteed home loan by using a comparison website, going through a mortgage broker or going direct-to-lender.
Both the borrower and the guarantor will need to provide proof of identity, income, savings and employment.
The guarantor will also need to provide documentation for the property they’re securing against the guaranteed home loan.
Borrowers and their guarantors should be honest in the application to avoid any disruption to the application process.
What are the pros and cons of guaranteed home loans?
As with any kind of financial product, guaranteed home loans have their upsides and downsides.
The pros of guaranteed home loans include:
- Enter the market sooner
- Potentially avoid LMI
- Get a lower interest rate
- Buy a more expensive home
The cons of guaranteed home loans include:
- Jeopardise the borrower-guarantor relationship
- Potentially pay LMI
- Take on a larger-than-average mortgage
What are some alternatives to guaranteed home loans?
Instead of a guaranteed home loan, parents can give their children a cash gift that they can use as a deposit. Most banks will want evidence that the borrower is not frivolous with their money. It is a good idea for the borrower to leave this money in their account for three to six months to display responsibility.
Parents could purchase the house with their children by buying in partnership. In this instance, the parents and children share the responsibility of repaying the home loan.
A parent assist home loan makes it possible for people to borrow up to 100 per cent of the home loan from their parents. In this scenario, the borrower can pay less interest than they would to a bank.
A home loan with bad credit has a better chance of being approved if the borrower has a guarantor.
Personal Finance Writer
Alex is a personal finance writer and PR professional at RateCity, and has been writing about finance for over three years. She is passionate about closing the gender pay and superannuation gap, and aims to help young Aussies to overcome their financial apathy and better manage their finances. Alex has been published in numerous print and online outlets, including Money Magazine, Lifehacker Australia, and Business Insider.
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Frequently asked questions
What if I can't pay off my guaranteed home loan?
If you can’t pay off your guaranteed home loan, your lender might chase your guarantor for the money.
A guaranteed home loan is a legally binding agreement in which the guarantor assumes overall responsibility for the mortgage. So if the borrower falls behind on their mortgage, the lender might insist that the guarantor cover the repayments. If the guarantor fails to do so, the lender might seize the guarantor’s security (which is often the family home) so it can recoup its money.
How do guaranteed home loans work?
A guaranteed home loan involves a guarantor (often a parent) promising to pay off a mortgage if the principal borrower (often the child) fails to do so. The guarantor will also have to provide security, which is often the family home.
The principal borrower will usually be someone struggling to find the money to enter the property market. By partnering with a guarantor, the borrower increases their financial power and becomes less of a risk in the eyes of lenders. As a result, the borrower may:
- Qualify for a mortgage that they would have otherwise been denied
- Not be required to pay lender’s mortgage insurance (LMI)
- Be charged a lower interest rate
- Be charged less in fees
How much can I borrow with a guaranteed home loan?
Some lenders will allow you to borrow 100 per cent of the value of the property with a guaranteed home loan. For that to happen, the lender would have to feel confident in your ability to pay off the mortgage and in the security provided by your guarantor.
What are extra repayments?
Additional payments to your home loan above the minimum monthly instalments, which can help to reduce the loan’s term and remaining payable interest.
What is a line of credit?
Equity is the value of your property, less any outstanding debt against it. For example, if you have a $500,000 property and a $300,000 mortgage against the property, then you have $200,000 equity. This is the portion of the property that you actually own.
This type of loan is a flexible mortgage that allows you to draw on funds when you need them, similar to a credit card.
Should I become a guarantor?
You should carefully weigh up the pros and cons before signing on as a guarantor – because while it can be very rewarding if everything goes according to plan, it can have serious consequences if the plan goes awry.
If the person you’re guaranteeing keeps up with their mortgage repayments, you’ll be able to take pleasure in helping them fulfil their dream of home ownership.
However if that person fails to meet their mortgage repayments, it might damage or destroy your relationship. Your finances might also be affected if the lender asks you to make the repayments or even seizes your home to settle the debt.
What does going guarantor' mean?
Going guarantor means a person offers up the equity in their home as security for your loan. This is a serious commitment which can have major repercussions if the person is not able to make their repayments and defaults on their loan. In this scenario, the bank will legally be able to the guarantor until the debt is settled.
Not everyone can be a guarantor. Lenders will generally only allow immediate family members to act as a guarantor but this can sometimes be stretched to include extended family depending on the circumstances.
What is a guarantor and guarantee?
A guarantor is a person, third party or organisation that agrees to guarantee your loan.
The guarantee is a legal assurance given by the guarantor to pay the loan if the borrower defaults and is unable to pay.
How does a line of credit work?
A line of credit functions in a similar way to a credit card. You have a pre-approved borrowing limit and can draw on as little or as much of that sum as you need it, with interest paid on the outstanding balance.
What is a guarantor?
A guarantor is someone who provides a legally binding promise that they will pay off a mortgage if the principal borrower fails to do so.
Often, guarantors are parents in a solid financial position, while the principal borrower is a child in a weaker financial position who is struggling to enter the property market.
Lenders usually regard borrowers as less risky when they have a guarantor – and therefore may charge lower interest rates or even approve mortgages they would have otherwise rejected.
However, if the borrower falls behind on their repayments, the lender might chase the guarantor for payment. In some circumstances, the lender might even seize and sell the guarantor’s property to recoup their money.
Can you remove a cosigner from a home loan?
Taking out a home loan is an act of financial responsibility and a cosigner on a home loan shares that responsibility. For this reason, removing a cosigner from a home loan may not be straightforward. Usually, you can add a cosigner, or become a cosigner, when applying for the home loan. In such a circumstance, the lender may ask you to stipulate the conditions for a cosigner release, which are the terms for removing a cosigner from the home loan. For instance, you may agree that you can remove a cosigner once half the loan amount has been repaid.
However, not stipulating such conditions doesn’t mean it’s impossible to remove a cosigner. If the primary home loan applicant has a sufficiently high credit score and has not delayed any repayments, the lender may be willing to remove the cosigner. You should confirm that doing so doesn’t affect the terms of the loan. If the lender doesn’t agree to remove the cosigner, the primary home loan applicant may have to refinance the loan in order to do so. If there were specific reasons for needing a cosigner and those reasons are still valid, then you may have some challenges with refinancing.
How do I apply for a home improvement loan?
When you want to renovate your home, you may need to take out a loan to cover the costs. You could apply for a home improvement loan, which is a personal loan that you use to cover the costs of your home renovations. There is no difference between applying for this type of home improvement loan and applying for a standard personal loan. It would be best to check and compare the features, fees and details of the loan before applying.
Besides taking out a home improvement loan, you could also:
- Use the equity in your house: Equity is the difference between your property’s value and the amount you still owe on your home loan. You may be able to access this equity by refinancing your home loan and then using it to finance your home improvement. Speak with your lender or a mortgage broker about accessing your equity.
- Utilise the redraw facility of your home loan: Check whether the existing home loan has a redraw facility. A redraw facility allows you to access additional funds you’ve repaid into your home loan. Some lenders offer this on variable rate home loans but not on fixed. If this option is available to you, contact your lender to discuss how to access it.
- Apply for a construction loan: A construction loan is typically used when constructing a new property but can also be used as a home renovation loan. You may find that a construction loan is a suitable option as it enables you to draw funds as your renovation project progresses. You can compare construction home loans online or speak to a mortgage broker about taking out such a loan.
- Look into government grants: Check whether there are any government grants offered when you need the funds and whether you qualify. Initiatives like the HomeBuilder Grant were offered by the Federal Government for a limited period until April 2021. They could help fund your renovations either in full or just partially.
Can I take a personal loan after a home loan?
Are you struggling to pay the deposit for your dream home? A personal loan can help you pay the deposit. The question that may arise in your mind is can I take a home loan after a personal loan, or can you take a personal loan at the same time as a home loan, as it is. The answer is that, yes, provided you can meet the general eligibility criteria for both a personal loan and a home loan, your application should be approved. Those eligibility criteria may include:
- Higher-income to show repayment capability for both the loans
- Clear credit history with no delays in bill payments or defaults on debts
- Zero or minimal current outstanding debt
- Some amount of savings
- Proven rent history will be positively perceived by the lenders
A personal loan after or during a home loan may impact serviceability, however, as the numbers can seriously add up. Every loan you avail of increases your monthly installments and the amount you use to repay the personal loan will be considered to lower the money available for the repayment of your home loan.
As to whether you can get a personal loan after your home loan, the answer is a very likely "yes", though it does come with a caveat: as long as you can show sufficient income to repay both the loans on time, you should be able to get that personal loan approved. A personal loan can also help to improve your credit score showing financial discipline and responsibility, which may benefit you with more favorable terms for your home loan.
How much deposit do I need for a home loan from ANZ?
Like other mortgage lenders, ANZ often prefers a home loan deposit of 20 per cent or more of the property value when you’re applying for a home loan. It may be possible to get a home loan with a smaller deposit of 10 per cent or even 5 per cent, but there are a few reasons to consider saving a larger deposit if possible:
- A larger deposit tells a lender that you’re a great saver, which could help increase the chances of your home loan application getting approved.
- The more money you pay as a deposit, the less you’ll have to borrow in your home loan. This could mean paying off your loan sooner, and being charged less total interest.
- If your deposit is less than 20 per cent of the property value, you might incur additional costs, such as Lenders Mortgage Insurance (LMI).
Are bad credit home loans dangerous?
Bad credit home loans can be dangerous if the borrower signs up for a loan they’ll struggle to repay. This might occur if the borrower takes out a mortgage at the limit of their financial capacity, especially if they have some combination of a low income, an insecure job and poor savings habits.
Bad credit home loans can also be dangerous if the borrower buys a home in a stagnant or falling market – because if the home has to be sold, they might be left with ‘negative equity’ (where the home is worth less than the mortgage).
That said, bad credit home loans can work out well if the borrower is able to repay the mortgage – for example, if they borrow conservatively, have a decent income, a secure job and good savings habits. Another good sign is if the borrower buys a property in a market that is likely to rise over the long term.
Can first home buyers apply for an ING home loan?
First home buyers can apply for an ING home loan, but first, they need to select the most suitable home loan product and calculate the initial deposit on their home loan.
First-time buyers can also use ING’s online tool to estimate the amount they can borrow. ING offers home loan applicants a free property report to look up property value estimates.
First home loan applicants struggling to understand the terms used may consider looking up ING’s first home buyer guide. Once the home buyer is ready to apply for the loan, they can complete an online application or call ING at 1800 100 258 during regular business hours.
How can I get a home loan with bad credit?
If you want to get a home loan with bad credit, you need to convince a lender that your problems are behind you and that you will, indeed, be able to repay a mortgage.
One step you might want to take is to visit a mortgage broker who specialises in bad credit home loans (also known as ‘non-conforming home loans’ or ‘sub-prime home loans’). An experienced broker will know which lenders to approach, and how to plead your case with each of them.
Two points to bear in mind are:
- Many home loan lenders don’t provide bad credit mortgages
- Each lender has its own policies, and therefore favours different things
If you’d prefer to directly approach the lender yourself, you’re more likely to find success with smaller non-bank lenders that specialise in bad credit home loans (as opposed to bigger banks that prefer ‘vanilla’ mortgages). That’s because these smaller lenders are more likely to treat you as a unique individual rather than judge you according to a one-size-fits-all policy.
Lenders try to minimise their risk, so if you want to get a home loan with bad credit, you need to do everything you can to convince lenders that you’re safer than your credit history might suggest. If possible, provide paperwork that shows:
- You have a secure job
- You have a steady income
- You’ve been reducing your debts
- You’ve been increasing your savings
How do I apply for Westpac’s first home buyer loan?
If you’re a first home buyer looking to apply for a home loan with Westpac, they offer an online home loan application. They suggest the application can be completed in about 20 minutes. Based on the information you provide, Westpac will advise you the amount you can borrow and the costs associated with any possible home loan.
When applying for a home loan with Westpac, you’re assigned a home finance manager who can address your concerns and provide information. The manager will also offer guidance on any government grants you may be eligible for.
Can I get a home renovation loan with bad credit?
If you're looking for funds to pay for repairs or renovations to your home, but you have a low credit score, you need to carefully consider your options. If you already have a mortgage, a good starting point is to check whether you can redraw money from that. You could also consider applying for a new home loan.
Before taking out a new loan, it’s good to note that lenders are likely to charge higher interest rates on home repair loans for bad credit customers. Alternatively, they may be willing to lend you a smaller amount than a standard loan. You may also face some challenges with getting your home renovation loan application approved. If you do run into trouble, you can speak to your lender and ask whether they would be willing to approve your application if you have a guarantor or co-signer. You should also explain the reasons behind your bad credit rating and the steps that you’re taking to improve it.
Consulting a financial advisor or mortgage broker can help you understand your options and make the right choice.