Purchasing your first home can be a long journey, in some instances you may have found a home that is within your borrowing potential, however you are yet to save up a 20% deposit. To avoid paying lenders mortgage insurance (LMI), if this is the case, you may still be able to borrow the higher amount without a 20% deposit by having a guarantor on the loan.
Having a guarantor can offer several benefits to first home buyers. Guarantors are especially useful in the case of a small deposit, as providing a guarantor can potentially mean reducing or completely avoiding the cost of lenders mortgage insurance (LMI).
While a guarantor can help you purchase your first home with a smaller deposit, due to their upfront contribution, it is important to keep in mind that as the borrower, you will be responsible for your loan repayments. Therefore, you will need to be able to service the entire loan with your income.
How much can you borrow with a guarantor?
While a guarantor can help you in your home buying journey, having a guarantor does not mean that your borrowing power will increase. Your borrowing power can be determined by considering your income and expenses to understand the amount of a loan you can service with your financial circumstances.
For example, if you wish to purchase a $400,000 property and only have a deposit of $20,000. This loan would have a Loan to Value Ratio (LVR) of 95%, which would incur LMI, if approved. However, if a family member is willing to provide a guarantee for the home loan, using the equity in their own property as additional security, the LVR would reduce and avoid the need for LMI.
Requirements for your guarantor
Generally, the main requirements to be a guarantor on a loan for someone is to be an immediate family member and a homeowner.
Many lenders will limit guarantors to immediate family, this can include parents, siblings and grandparents. In some cases, lenders may allow extended family members or even ex-spouses to be guarantors, although this can vary depending on the lender.
Your guarantor must also be a homeowner, as they will need to provide equity from their home to form part of the security on your home loan.
When considering being a guarantor or having a discussion with a family member to be your guarantor, it’s recommended that your guarantor should seek independent legal and financial advice before accepting the role. This is to help mitigate the risk and ensure your guarantor understands the responsibilities, as they may be asked to pay off your home loan, in the event repayments cannot be made.
If you’re thinking about using a guarantor on your first home loan, you can speak with a mortgage broker who can explain the process of what is involved and how much you could borrow with a guarantor.
