Becoming a first-time homeowner has become increasingly difficult in recent times, as low or no deposit loans have disappeared off the lending landscape. Gone are the days, where a first time borrower could lend upwards of 95% of the property’s value, plus enough to cover the extra costs associated with the loan.  In today’s current market, a minimum of 20% of the property’s purchase price is required by most lenders, however if you are prepared to pay Lender's MortgageInsurance (LMI), you may be able to borrow more. This scenario is based on full documentation, if you are a low doc borrower however, you can expect to need up to 40% minimum deposit.

So what options are available to first home buyers with little or no deposit?

Increasingly, family members such as parents are stepping in to assist first-time borrowers get into the home loan market by offering up the equity in their own home as a security for the loan.

This is referred to as a Guarantor Loan. Having a guarantor, means a borrower can lend 100% of the property's value and avoid LMI at the same time.  With the help of a guarantor, borrowers with little or no deposit don’t have to rely on winning Tattslotto to buy their first home!

What is a guarantor loan

A guarantor loan is when the loan cannot be supported on its own by the borrowers.  

A guarantor therefore, is a third party to a home loan, helping a borrower to get a loan by providing added security. This person is often a close relative such as a parent, spouse or other family member.

There are two main types of guarantor loans - security guarantee and or a servicing guarantee.

A security guarantee is the most common form of guarantor loan, using a third party’s property (usually a family member’s) as additional security for a borrower’s loan.

A servicing guarantee is less common and is not offered by all lenders. It is when a guarantor agrees to help the borrower meet their regular repayments. The remainder of this article will focus on the security guarantor.

Security guarantor

It is important to understand that a guarantor takes legal responsibility for paying off a loan in place of the borrower. The guarantor commitment is only triggered if the borrower is no longer able to meet their financial commitments.

When a person goes as guarantor, they are committing to repay the loan if the borrower can’t and this in turn lowers the risk to the borrower, thereby enabling up to 100% of the purchase price of a property.

How does a security guarantor loan work?

It works by allowing the equity in the guarantor's property to be used as additional security against the loan.

The primary security for the loan will be the borrower’s property, but the lender will also take a mortgage over your guarantor’s property. This mortgage will not support the loan directly but will be used to support a guarantee.

How will having a guarantor help?

Having a guarantor can be the difference between being able to get into your own home sooner rather than later - depending on how long it takes to save for a deposit!

Once a borrower has built up equity in their property, the guarantor can be released from the loan.  The timeframe for this is dependent upon how much is paid down on the original loan and whether the value of the property has increased.

What happens if the borrower cannot pay back the loan?

When entering into any legal undertaking, it is important to understand the implications for both the borrower and the guarantor.

If the borrower defaults on the loan, the lender can take legal action against the borrower and in some circumstances, the guarantor. The guarantor will be liable for the amount specified in the guarantee.

A guarantor should seek independent legal and financial advice before entering into any contract as guarantor. This is something that the lender would usually require anyway.

Another important thing to note, is that that a guarantor’s own borrowing capacity will be reduced after they become a guarantor.

Want to get a better idea of your own situation?

Do you have your own scenario that you’d like to run through the Guarantee Loan Process? Contact Collins Homes Loan for specific advice on your current situation.