A guarantor home loan is basically an assisted pathway enabling you to qualify for a loan without having met the 20% deposit requirement laid down by most lenders. This particular route to homeownership will also allow you to avoid Lenders Mortgage Insurance (LMI).
‘So, just who is doing this assisting,’ I hear you ask, and where do you sign up?
To qualify for a guarantor home loan, you need only one thing and you guessed it, it’s a guarantor.
Who Can Be My Guarantor?
While that line may make you want to break into hopeful and impassioned song, fortunately you won’t need to sing to get an answer.
To secure a guarantor home loan, you can be ‘guaranteed’ by immediate family/relatives AND (within some institutions) close family friends — yay! Though keep in mind that any relationships not within your family unit will attract a deeper level of scrutiny to make sure they’re legit.
So How Exactly Does A Guarantor Home Loan Work?
If you’re a poker player, then this is an all-in situation for the guarantor and yes, it’s a gamble, and yes, it’s you they’re gambling on. The bank or lender who requires this has now side-stepped any potential issues they might have had trying to recover the full amount of your loan, and they’ve also secured all of that delicious interest.
Fortunately, being a guarantor isn’t a life sentence so people who’ve spaced out having children can offer this to all of their offspring. Or none of their offspring.
Jokes aside though:
Every lender has a slightly different approach to guarantor home loans, so it’s wise to shop around if this is the avenue you’ve chosen.
Here’s an example of the way lenders break down a guarantor home loan into two parts:
- One portion of the loan for the majority of the property value (usually 80%)
- One smaller portion of the loan for the remainder of the property value that wasn’t met with the deposit amount (up to 20%)
This is very similar to the way Sucasa structure our loans, with the one very obvious exception — the entire amount of the loan can be held by you, leaving you independent of your family and firmly in charge of your own life and portfolio. Usually the interest rate applied to the loan will vary, with the smaller proportion of the loan frequently incurring a slightly greater interest rate.
Guarantor Home Loans — Holding Your Hand Or Leading You Blind?
As someone seeking to secure this kind of loan, you’ll understand that a guarantor home loan significantly boosts your borrowing capacity, nay, it ensures you the ability to buy as it provides you an assurance into the housing market. We can all agree that takes a lot off the plate of any prospective first-time buyer — please take my hand, I’ll gladly follow!
Once this guarantee is in place, some lenders will dangerously unclip the rope and lead you straight into the VIP section where, with stars in your eyes, you can suddenly borrow up to 110% of the property price. This is like approaching a bar with enough money for a glass of Prosecco but instead of using your cash for that, you put an entire bottle of Dom Perignon on your boss’s credit card instead. Money never miraculously materialises — someone will always have to foot the bill eventually. So keep your eyes open.
When reading up on the ins and outs of guarantor home loans, we can be lead to believe that enthusiastic boomers are kissing away the worries of their children and grandchildren by offering up their houses, and flicking them the keys to the car while they’re at it.
While many parents could (and would) offer exactly that to their children, many cannot and are put in an awkward situation when asked. Loosen that tie, this family dinner is about to get uncomfortable.
Until deep into adulthood, many of us aren’t really aware of the reality of our family’s finances. Talking about money can be difficult and we need to remember that we’re not all ‘entitled’ to our family’s wealth — regardless of how they accumulated it.
Guarantor Home Loan — The Two Sides Of The Coin
So with the benefits of guarantor loans looking like they’re predominantly all to the borrowers and the banks, let’s take a look at what this means for the guarantor.
It could damage relationships
They say never mix money with friendship and the same goes for family. There’s a high level of trust required with a guarantor home loan and, once trust is broken, it’s not easily regained.
If you find yourself lucky enough to have secured someone as your guarantor (either willingly or reluctantly), then this friend or family member is responsible for your debt if you’re unable to pay back the loan. If this happens, the chances it won’t have a detrimental effect on that relationship and other relationships stemming from it are slim. So be alert and aware of the possibilities.
It ties their hands financially
This type of borrowing can have a negative impact on the guarantor, leaving them unable to expand their own portfolio or succeed in applying for a loan for other reasons like holidays, renovations, or helping out someone else within their personal sphere.
Other basic and thankfully less emotional risks run in the form of the scrutiny. Guarantors are put under enormous financial scrutiny as mortgage lenders look at every aspect of their incomings and outgoings, including all outstanding debts. Sometimes they even take age and health into account.
This is because lenders rightfully assume that a guarantor would prefer to pay out any debt they incur (via this guarantor loan) with cash rather than forfeit or remortgage their actual house.
So it’s important the lender does this kind of deep investigation, as the lender wants to make sure they, the guarantor, will be able to do exactly that.
Lenders will leave no stone unturned in making sure the guarantor is able to cover the borrower’s debt should this situation arise.
There’s no turning back
Once the loan agreement has been signed and the loan has been paid out, the guarantor is 100% committed. The lender won’t remove them from the agreement, as their credit history, employment status, and other influences all had an impact on the approval of the loan in the first place. As stated earlier, fortunately these loans do have a much shorter life span than the terms of the mortgage.
They may have to pay back the entire debt
The guarantor does stand to lose whatever equity they’ve put on the line, so it’s a huge risk for whoever you rope in. This is the worst case scenario but it’s worth mentioning. In the event of you losing your job and defaulting on your mortgage, the guarantor will be your lender’s first phone call. As a guarantor, you basically have a second mortgage in the eyes of the bank.
Assuring The Guarantor With Insurance
Tongue twisters aside, there is a simple way for a guarantor to protect themselves — they can get insurance.
Guarantor insurance is a great way (well, the only way really) for a guarantor to protect themselves from any potential legal issues that may arise. This insurance will cover any payments the guarantor is responsible for if the borrower defaults on their mortgage payments.
It does seem a little sad that the only way for a guarantor to genuinely protect themselves is to dosh out even more cash to insurance companies. It was avoiding LMI that got us into this mess in the first place!
But, as the guarantor, what are the benefits?
Guarantor Home Loans — Panning For Family Gold
At this point we must assume there must be an upside for the guarantor too because if it’s all cons, why would anyone ever put themselves in the position of a guarantor?
Guarantor home loans are seen by some as yet another uncomfortable financial lean the younger generation are being forced into due to the difficult property market. Like The Bank of Mum and Dad, it’s not available to everyone, once again forcing the divide between those who have and those who have not, wider.
Unlike The Bank of Mum and Dad however, where cold hard cash is required, with a guarantor home loan, no money changes hands. And within a strong family unit, there’s hopefully established trust and clear communication. This could mean that all of the outlined risks may just be moot points.
People like to help and when they are able to, doing so just feels good!
You see, the benefit is essentially philanthropic, but hopefully by offering this kind of financial support, you’re literally seeding the river bed with golden nuggets for the future generations of your family to benefit from. And that, my friends, is a guarantee.