Saving $1,000s in bank fees is on every OzBargainer's wishlist, and a guarantor home loan can help you achieve this.
A guarantor loan is a means for a home buyer to get onto the property ladder sooner, with a smaller deposit.
In it's simplest terms, it's a loan secured against your new purchase property AND your parent's property. There's more collateral for the bank, therefore less risk, so they're prepared to lend you more money.
Traditionally you'd need 20% deposit saved up, however here's a quick run through (and happy to take questions) of a guarantor loans to debunk the misconceptions.
Note I will be broad and general here, bank policies around guarantor loans are very intricate and vary greatly, so I'll try and give you a flavour of what can and can't be done. No advice given, do your own research.
Ok here goes…
1) You effectively need zero savings. Yes, you read that right.
As the bank uses equity /security / collateral from mum and dad's property, you can borrow against a portion of their property, providing you demonstrate the ability to repay the whole loan yourself.
2) You can also borrow additional amounts for stamp duty, legal fees and associated purchasing costs. This does normally exclude debt consolidation and renovations however.
This means you can borrow more than the purchase price, usually capped at 5% of the cost, i.e. $500k purchase price = maximum $525k loan.
3) You'll avoid all LMI (Lender's Mortgage Insurance) fees, as the bank will assess you akin to borrowing with a 20% deposit.
This LMI cost saving can be around 3% of the purchase price, i.e. $15,000 saving on a $500k purchase. Now that's an OzBargain!
4) Mum and dad's income can generally not be taken into account.
Why?
Well, if you're the one buying, owning and living in the property, the bank will likely ask what's the benefit to them being on the loan. And there isn't one.
5) I keep referring to "mum and dad" as that's the most common setup, however this can extend to immediate family (offspring, siblings, parents, grandparents)
They'll need to be in a decent financial position with good equity held (small or no loan against their property)
6) Guarantor's don't stick around forever. As soon as you have a 20% holding (with a bank valuation) and demonstrate good repayments, you can request to remove them for good.
7) The risks. If you stop making payments, you're risking mum and dad's property. Simple as that. Get income protection.
If mum and dad want to sell their property in the short term, a guarantor may not be the right option for you. In this case, the bank may ask you to stump in the applicable LMI fees, which can set you back $1,000s.
8) Not all banks like guarantor loans. Some flat out don't do them. Some will ask lots of questions, some have minimal requirements.
There's only really a handful of banks I think have really nailed guarantor loans.
Hope you found this guarantor runthrough useful, hit me up with your questions!
About me - I've been in home lending for 8 years and settled well over 1,000 home loans, including dozens of guarantor loans, and 46 happy OzBargainer loans to date.
Thanks for reading,
Aidan Hartley.
Why is there just a single line explanation of what happens to mum and dad when the loan defaults?