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.