One of the biggest challenges for first-home buyers in today's market is saving a sufficient deposit. You should save at least 20% of the home's value to place as a deposit, which can be difficult when wages are stagnant and you have climbing bills to pay. There is a solution to this, however. A guarantor can help you get to where you want to be much quicker.
A guarantor is someone, generally a close relative, who acts as security for the loan. By signing for the home loan with you, they are essentially offering you equity from their own home to secure your loan. They don't need to contribute cash at the time.
Whether you are thinking about using a guarantor for your first home purchase or not, it's always wise to find the best mortgage broker Sydney. Let someone else do the legwork to find you the best possible loan deal for your individual circumstances.
When you go down the guarantor route, you may need no deposit at all or only a small deposit. The guarantor's home equity stands in place of this or tops it up.
As an example, if you are searching for homes at the value of $250,000 and you have already saved $25,000 that is only 10% of the home's value. Most lenders expect buyers to put down at least 20% of the home's value. Instead of saving an additional $25,000, which may take quite some time, a guarantor loan is a perfect solution.
It doesn't cost the guarantor anything, the only risk for the guarantor is if you default on your payments.
Not just anyone can act as a guarantor for a home loan – it needs to be a family member. This is generally a parent, sibling, or grandparent. Though, some lenders may allow you to branch further into your family tree. Additionally, the guarantor has to be a homeowner, as their equity is part of the home loan security. Equity is defined as the difference between the balance of a home loan and the value of the property.
It's a big decision for anyone to take on, and not just anyone would be willing to act as a guarantor. If you fail to make the repayments of your home, the lender will pursue the guarantor for the balance of your home loan. If someone was thinking about acting as a guarantor, they should seek advice from independent legal counsel and a financial advisor. In fact, many lenders will require this before they proceed with a guarantor loan.
How Having a Guarantor Helps
Saving an adequate deposit is a daunting experience, but a guarantor can ease your passage into home ownership. Work with a mortgage broker to find the right deal and be ready to put up some form of deposit in certain cases.
There is another benefit of having a guarantor. When your deposit is less than 20%, you have to secure Lender's Mortgage Insurance. However, this is not necessary in the case of a guarantor home loan so that is an automatic cost saving.
Your guarantor doesn't have to be locked in for the life of your home loan either. Once you have had time to build equity in the property, it's possible for the guarantor to be released from their responsibility. However, how quickly this can happen will depend on the repayments and original deposit. However, there may be fees to pay to release them from the contract so be sure to look into this before you make any decisions.