How Do Guarantor Home Loans work?
When a potential home buyer lacks deposit funds to put towards a purchase a viable option can often be a family guarantee or guarantor home loan.
What is a Family Guarantee?
A guarantor loan is when a family member (usually a parent) offers security in their own home in lieu of the purchaser having little or no cash deposit. Not only will this assist the prospective new homeowner in obtaining their first home sooner, but it will also eliminate paying Lender’s Mortgage Insurance.
In most cases the lender will limit the guarantee to only the amount needed to keep the lending against the purchase at an 80% Loan to value ratio.
Once the guaranteed portion of the loan is paid down or the value of the purchased property increases so the loan to value ratio does not exceed 80% without the guarantor property as part of the security position, the guarantee may be removed.
What do you need to know before offering a guarantee?
There are, however, factors that need to be considered when choosing this path:
- If there is already a guarantee in place for another child, adequate equity must exist in the property.
- If the guarantor has a home loan of their own their must be adequate equity available and the existing lender must have a family guarantee policy.
- If existing lender does not have a family guarantee policy, the prospective guarantors must qualify to refinance to a lender that does.
- Legal advice is often a requirement by some lenders for guarantors to obtain prior to settlement.
- The guarantee will remain in place until the bank deems there is enough equity in the child’s property either through paying the home loan down or by favourable valuation.
Guarantees are a viable and common way to assist in purchasing a home when a deposit is lacking yet the capacity to pay a loan is evident. Talk to one of our experienced mortgage brokers for more information.