Guarantor Home Loans
Increasingly popular options for many home buyers, guarantor home loans are being used in greater numbers to purchase a property. These loans are actually no different to any other home loan, the main difference is the security offered to guarantee the deposit.
Many lenders allow people to provide assistance known as a guarantor. Typically these people are direct family members eg a parent. They are not a co-applicant for the loan so they are not listed in the lending documents and are not responsible for the entire loan. A guarantor is only responsible for the payment of the loan they have guaranteed to support.
Guarantor home loans are usually only used when the applicant has a limited deposit, typically less than 20% of the purchase price (the deposit amount). Guarantees such as these are used to avoid costly Lender’s Mortgage Insurance (LMI) that would otherwise be charged by the lender to protect their interests in the loan.
How does a Guarantor Home Loan work?
You make the usual application for finance. You must be able to afford to service (pay off) the loan in your own right, a guarantor is not a co-applicant for the loan. The financial products offered will be the same as making a standard finance application. The main difference is the security offered. You will offer two securities for the property. The main security will be the home you are purchasing. The second or guarantor security will be another one offered to secure the deposit for the loan.
As these loans are seen as slightly more risky for lenders it is very helpful if your credit history is very good. If you have any missed payments or outstanding bills pay them off before applying. Any marks on your credit file will work against you.
The lender will take a mortgage out over the guarantor’s property. This mortgage will continue to be in place until the guarantee expires. It is important to note that the second mortgage does not support the loan – you must be able to support the loan yourself for your own income sources.