Saving for a deposit on your first home can feel like an uphill battle. Between rising rent and ever-increasing property prices, it’s easy to feel discouraged. But what if there was a way to secure your dream home sooner and potentially save thousands of dollars on Lender’s Mortgage Insurance (LMI)? Guarantor loans are a unique option that leverages the equity of a close family member’s property to help you bridge the deposit gap.
Understanding Guarantor Loans
A guarantor loan allows you to borrow the full purchase price of your chosen property, including closing costs. This loan is secured by two assets:
- 80%: Secured by the value of your new home
- 20% + Closing Costs: Secured by the value of your guarantor’s property
This combined value allows you to avoid LMI, which can translate to significant cost savings. However, it’s crucial to remember that using a guarantor loan comes with its own set of responsibilities and potential risks.
The Benefits of Using a Guarantor Loan
- Lower upfront costs: Avoid LMI, potentially saving thousands of dollars.
- Enter the market sooner: Achieve your homeownership dream without waiting for a larger deposit.
- Build equity faster: Start building equity in your own property from day one.
Eligibility and Requirements
Guarantor loans aren’t for everyone. Here are some key points to consider:
- Eligibility: You must be a first home buyer with a stable income and good credit history.
- Guarantor requirements: Your guarantor must have significant equity in their own property and meet specific income and creditworthiness criteria.
- Property restrictions: The guarantor’s property may need to be located in Australia and meet certain value requirements.
Different Types of Guarantor Loans
Not all guarantor loans are created equal. Here are two common types:
- Family Guarantee: This option involves using a close family member, like a parent or sibling, as your guarantor.
- Non-Family Guarantee: This option uses a non-family member, typically a friend or business partner, as your guarantor, often requiring stricter eligibility criteria and higher interest rates.
Alternatives to Consider
While guarantor loans offer benefits, they might not be the right fit for everyone. Explore alternatives like:
- First Home Owner Grant: Government grants available to eligible first home buyers.
- Deposit Schemes: Government-backed schemes that help first home buyers save for a deposit.
- Saving Strategies: Explore budgeting techniques and high-interest savings accounts to accelerate your deposit savings.
The Guarantor Loan Process
Applying for a guarantor loan involves several steps:
- Research and compare lenders: Different lenders offer varying guarantor loan options and rates.
- Pre-approval: Get pre-approved to understand your borrowing capacity.
- Find a guarantor: Discuss the implications and responsibilities with your chosen guarantor.
- Formal application: Submit your application with required documents and guarantor information.
- Loan approval: Upon approval, finalise the loan agreement and proceed with property purchase.
Owning your own home is a significant life milestone, and guarantor loans can unlock that dream sooner for eligible first home buyers. While carefully considering the responsibilities involved for both you and your guarantor is crucial, the potential cost savings and faster entry into the market make this option worth exploring.