When you’re desperately trying to save up a deposit for a home and just see the prices of property climbing and climbing, it can be really disheartening. We get it.
If you find yourself thinking “Will I ever own a property?”, there is a solution you might not have considered – using a guarantor to help. Formally, these are known as family pledges and there are two types available to borrowers: service guarantees and security guarantees.
Service guarantees are less common, and they involve a family member guaranteeing all of the repayments on a loan, as well as being named on the property title. Tip: A drawback of this approach is that it usually means first home buyers are not entitled to any government grants.
A more popular option is a security guarantee. Borrowers who have a limited deposit often use this approach. In this situation, a relative or friend (usually a borrower’s parent or parents) is prepared to use the equity in his or her own home to guarantee the deposit of the borrower.
Let’s look at an example.
Imagine you have a total loan amount of $600,000. In a security guarantor situation the borrower/s would take on the debt of 80 per cent of the value of their loan, which would be $480,000, in their own name/s. The loan for the balance, $120,000, is then guaranteed in the names of the guarantor/s and borrower/s, limiting the guarantor’s liability while providing security for the lender, meaning that lender’s mortgage insurance is not necessary.
It is a very popular way of entering the market for first home buyers and works well when borrowers don’t have a substantial deposit, but their parents own their own home. If you are thinking about exploring this option, it’s important that all parties understand what is involved and that the guarantor is comfortable with the borrower’s ability to make their repayments.
At Pointer Finance we’d be happy to facilitate this conversation and explain how the process works with all involved parties. Drop us a line below to set up a no-obligation chat.
Email mark@pointerfinance.au