How they can help, and what you need to be aware of:
Getting your foot onto the property ladder has never been easy. Now, it’s verging on impossible.
In today’s property climate, it could take up to nine years to scrape a deposit together. House prices are higher than ever before.
For many people, a guarantor home loan is an option but there are pros and cons to be aware of.
Guarantor home loan explained
A guarantor can help you into a home if you have a bad credit score or don’t have enough for a deposit. They’re typically family members, like a parent or grandparent, but they could be anyone willing to help you.
Your guarantor legally vouches for your ability to pay. That means that if you fail to meet your repayments, your guarantor will have to cover them. They may
use their home as security, or they could agree to be a financial backup with their savings and assets.
That sounds great but there are risks for both parties. Here’s what you need to know.
Guarantor home loan – pros for the homeowner
Get your foot in the door
If you don’t currently own a home, you’re probably getting sweaty palms watching house prices grow by the minute. Having a guarantor could well be the only (or at least the easiest) option you have.
Increase borrowing capacity
Banks will see you as a much lower risk if you have a guarantor. For that reason, you might be entitled to borrow more than you would without their help.
Buy without a deposit
Your guarantor may help you out with a deposit in cash or by leveraging the value in their home. That means you can buy without any savings. Savings you do have can be kept as backup funds for your mortgage repayments or to spend on something else.
Take the stress away
When you’re just starting the home-ownership game, a house deposit will blow all your savings – and finances will be tight. If you can’t pay back your loan, a guarantor has your back and you don’t need to worry about potentially losing your home.
Avoid lender’s mortgage insurance
If you don’t have a deposit of at least 20%, most lenders will charge low equity margin or low equity premium. With a guarantor, you’ve got support behind you – and you’ll likely be able to dodge these fees.
Guarantor home loan – cons for the guarantor
Commit to being locked in for the long run
You might agree to be a guarantor to help someone you love into a home, but have you thought about the long-term repercussions? The average person will have a mortgage for at least thirty years. That’s thirty years you’ll also be financially liable if the homeowner can’t make repayments. Make sure you’ve thought that through before you sign on the dotted line.
Risk a bad credit score
If things turn to custard and the mortgage can’t be repaid by the owner, the bank will come to you for the money. What if you’ve also encountered an unfortunate financial situation, and now can’t afford to pay back the loan?
Lose your home
If you have decent equity in your home, you could offer it as security for the person buying a new home. But if they can’t pay their mortgage back the bank will take your home in exchange.
Guaranteeing a loan is a huge financial commitment – particularly if it’s not your own. And if things get messy and don’t go to plan, you risk ruining relationships with your loved ones.
Face financial liability
If the owners can’t pay the mortgage back for any reason, you’ll have to – and the bank will chase you for the cash. Even if you were only meant to help with the deposit, you could face financial responsibility for the entire mortgage.
A guaranteed good idea, or not? You choose
In today’s housing market, a guarantor home loan may be the only option for many people. While that can come with many benefits for the homeowner-to-be, it can also put the guarantor in a tricky position if things don’t work out. You need to weigh up the pros, cons and priorities, and decide if a guarantor home loan is right for you.
Looking to buy your first home? Global Finance can walk you through the process, and help decide if a guarantor home loan is right for you. Contact us today to get your application started.
**These are general guidelines and are by no means a reflection of bank or lending policies