The Role of a Guarantor in Home Buying
Thinking about buying a home but feeling like your deposit is nowhere near that magical 20%? Or maybe you’d love to skip the added cost of Lenders Mortgage Insurance (LMI)? A guarantor might just be your golden ticket to getting into your home sooner.
What is a Guarantor?
A guarantor is someone who’s got your back—they help you secure a mortgage by offering additional security to the bank, usually with a property they own. This generous move can help you buy a home with a smaller or even no deposit, while also dodging the dreaded LMI. Sound like a win-win? It is—but let’s unpack it a little more.
How Does It Work?
Here’s the deal: the bank needs to make sure your guarantor is up for the job. They’ll look at:
Financial Stability: Can your guarantor support the guarantee without putting their own finances at risk? (We’re all about keeping everyone’s heads above water here.)
Equity Requirements: Most banks like to see that your guarantor has solid equity in their property. For example, if their home is worth $1 million, the total of what they owe plus the guaranteed portion usually can’t exceed $700,000 (that’s a 70% Loan-to-Value Ratio or LVR, for the finance nerds out there).
Documentation: Your guarantor will need to hand over some ID and basic financial details, but it’s typically a lot less paperwork than you’ll need to wrangle.
Key Points to Remember
Loan Affordability: Having a guarantor doesn’t mean you can borrow more. You still need to show the bank you can comfortably handle your mortgage payments—no shortcuts there!
Guarantor’s Role: Usually, a guarantor is a close family member or legal guardian who steps up to back your loan. If you miss payments, the responsibility to repay falls on them (so let’s keep those repayments in check, shall we?).
Recovery Process: If you run into financial trouble, the bank will work with you first, trying things like alternative payment options or selling the property. If there’s still a shortfall, your guarantor will need to cover it—which could mean dipping into their savings, taking out a loan, or even selling the property they used as security. (Yikes! Let’s avoid that.)
What’s in It for the Guarantor?
Being a guarantor is a big deal, and we always recommend they chat with a broker (hey, that’s us!) and get independent legal and financial advice. It’s so important for them to understand exactly what they’re signing up for. There might be a small cost for this advice, but trust us—it’s worth every cent.
Benefits of Using a Guarantor
Reduced Upfront Costs: No LMI? Yes, please! That’s money staying in your pocket.
Better Interest Rates: With the added security on your loan, you could score a better interest rate. Nice!
Expanded Buying Power: Your guarantor’s support might mean you can buy a home with $0 or up to 20% of the home's value as your deposit. Hello, dream home!
When Can a Guarantee Be Released?
The good news? Being a guarantor isn’t forever. Here’s how they can say goodbye to that role:
Increased Equity: Once your mortgage payments or a rise in property value bring your loan-to-value ratio (LVR) to 80%, you can ask to release your guarantor by signing a release form. Easy as that!
Refinancing: If you refinance your mortgage and the new terms meet the lender’s criteria without needing additional security, your guarantor is off the hook.
Full Repayment: Once the guaranteed portion of the loan is fully repaid, their obligation automatically ends. High fives all around!
Ready to See if a Guarantor Can Help You Buy Your Dream Home?
If you’re thinking this could be your way forward, let’s chat.
We’re here to answer all your questions, break it down step-by-step, and help you figure out if this option is right for you.
Reach out today, and let’s make your dream of homeownership a reality!
Your Broker,
Tara
Congratulations!
This blog completes Stage One: Prepare & Save.
Are you ready for the next stage in your Home Buying Journey?
Check out our blogs for Stage Two: Plan & Borrow here.
