When buying a home in Perth, you will typically need to put down a minimum 5 per cent deposit to get approved for a loan. This requirement can prove challenging if you’re still paying rent. Fortunately, Perth home builders like WOW Homes say your family can help you buy your new home by acting as a guarantor. Here’s what you need to know:
What is a guarantor?
Many lenders and banks will be more willing to help you attain a loan if you have a guarantor to back you up. A guarantor is anyone who can offer the assurance of loan repayment (but only a portion of the loan) if the borrower fails to fulfil their commitment with making the repayments. This lowers the risk associated for the lender, who may even decide to lend you as much as 100% of the property’s purchase and construction price.
Guarantors don’t have rights over the property or any other items acquired through the loan, so you don’t have to worry about them taking it away from you in the future; they’re just an additional trust factor for the lender that repayments will be made in a timely manner. Generally, only immediate parents can qualify as guarantors, though some lenders also recognise siblings, grandparents, and even extended relatives as guarantors.
What happens to the guarantor’s equity?
A guarantor permits their properties or assets as equity to be used as additional security for the lender, but this equity will not directly support your loan; it only serves as a guarantee should you fail to pay it that the lender will still receive what is owed. The primary loan security will still come from your own personal property as the borrower first, so it’s important to keep on top of your finances and have a plan in place.
What happens if the borrower cannot fully repay the loan?
If you are unable to pay back the loan as stipulated in the contract, the lender can press legal charges against you and your guarantor, and then may claim some of your personal assets to cover the remaining loan value. Your guarantor’s liability, however, is only limited to the amount indicated in the guarantee, which may range from the full loan amount to 20 per cent of the loan depending on the lender’s policy.
Well-meaning lenders will usually require guarantors to acquire independent financial and legal advice before signing a guarantee. If you ever feel you may not be able to make a repayment, it is best to always speak your loaner first to see if you can negotiate a safe alternative before seeking further financial and legal advice.
What are the other benefits of having a guarantor?
Guarantor loans help you save thousands of dollars by not having to pay Lenders Mortgage Insurance or LMI, a type of insurance that lenders can use to cover the risk of high loan to value ration lending. Usually, LMI is a requisite for home loans where a borrower deposits less than 20 per cent of the total loan.
Although this covers the risk in case you fail to pay off your loan, you’ll have to pay for its premium, which can be around $7,000 extra on a $300,000 loan, and ~$40 extra per month OR $9,600 extra over 20 years if capitalised; on top of your loan*.
Ultimately, guarantor loans are a good means to fund a house and land package in Perth if you haven’t saved enough for the deposit but are truly capable of repaying it AND if you have established trust between you and your guarantor.
*These figures are estimates based on a $300,000 loan with a loan to value ratio ~93%, and capitalisation of ~5%. For accurate and current figures please speak to one of our financial advisors.
Sources: 7 tips to help your child with home ownership, RealEstate.com.au
Loans involving family & friends, MoneySmart.gov.au