Guarantor loans, how do they work?

Guarantor loans can help you get into a property with a low, or no deposit. They let you borrow between 100% and 105% of your property purchase, meaning you don’t need to save up a deposit and avoid lenders mortgage insurance – and best of all, you are still eligible for discounted interest rates! Want to know how they work? We take you through all the details in this guide.

What are the benefits of a guarantor loan?

We have previously covered the benefits of a guarantor loan but to remind you, in short they are:
  • No deposit required
  • You can receive special interest rates
  • You save loads by avoiding Lenders Mortgage Insurance
  • You can consolidate smaller debts like credit cards and personal loans
What are some of the loan types you can obtain through a guarantor loan?
Guarantor loans allow you to borrow between 100% and 105% of a property, and at the moment this is the only way you can borrow this much – but what types of loans, and borrowers are these guarantor loans suitable for?
  1. First Home Buyers: You can borrow up to 105% of the properties value
  2. Construction or Building Loans: 105% of the land price, and construction price.
  3. Refinancing Loans: Up to 100% of your properties value is available
  4. Consolidating Debt, as well as purchase: In some cases you can access 110% of the properties value.
  5. Investment Loans: You can access 105% of the investment properties value.

Am I able to get a Guarantor Loan if I have owned a property before?

This really depends on the lender, lots of lenders out there do not allow a guarantor loan for a second home buyer because they expect (after having owned one property) that the second home buyer should be in a stronger asset position to be able to buy a property without a guarantee. This isn’t really fair if you have recently gone through a divorce or major illness, so we know which lenders will work with you and be less conservative when assessing loans.

How do Guarantor Loans actually work?

You get a guarantor, like a parent or relative who can provide a property that the bank can use as security towards your lending. The idea of this is using your guarantor’s property as security, you can borrow a higher amount, not having to wait to save up and get into the property market much sooner.
After a few years the idea is then you should have paid off the part of your loan which is secured by your guarantors property (or your property has increased in value) which will then allow you to remove their guarantee!
These types of guarantee loans have become really popular over the last few years because they let you get into the property market without a deposit, and actually cost less than standard home loans!

Is it possible to borrow over 105%?

Previously some lenders have lent up to 120% of the purchase price on a guarantor home loan, unfortunately these loans are no longer available in the market. As we covered above, in most circumstances you can borrow up to 105% of the purchase price which generally covers the purchase, stamp duty and other costs. In some situations you can lend up to 110% to consolidate some existing debts, but these debts generally cannot be more than 5-10% of the purchase price.

Do I need to show savings with guarantor loans?

Although you can access over 100% of the purchase price from lenders using a guarantor loan, some lenders will still want to see at least 5% of the purchase price in what is called genuine savings. This is basically money that you have saved away yourself, but don’t worry there are some exceptions like using rent that you have paid as genuine savings. You can talk to us today about which lenders will will not require genuine savings.

Can anyone be a guarantor on my loan?

In the majority of cases the banks will only allow your parents to be a guarantor, but there are some exceptions to this. There are a few lenders who will consider guarantees from your immediate family like brothers, sisters, grandparents, spouses or adult children. Generally friends or associates are not accepted because the bank wants to be sure you have a really strong relationship with the guarantor.

Can you give me an example of a Guarantor loan?

The background

Cherise had been renting for a few years, and after moved a few times in the last 12 months she wanted to get her own home. She found a perfect 1 bedroom unit not far from where she had been living, and the property was going for $400,000. Cherise knew if she didn’t jump onto it quickly she could miss out.
The tough thing was because she had been renting for a few years she wasn’t able to save up a big deposit, she would need at least 5% deposit or $20,000 plus her costs to purchase the property to get a home loan – so she was stuck, and wouldn’t be able to stop renting.

Cherise’s solution

Instead of having to save up $20,000 plus the costs Cherise spoke to her parents who owned their home which was worth $500,000 and had a $200,000 mortgage on it.
Luckily for Cherise, she was able to use her parents property as guarantor security, she was able to borrow 105% of the purchase price to cover her home loan and other costs to get into her new home! Not to mention she saved well over $15,000 in Lenders Mortgage Insurance costs she would have otherwise paid if she had only a 5% deposit.

Why a guarantor loan worked for Cherise?

  • Cherise was able to buy the property quicker, without having to wait and save a deposit
  • She was able to save $15,000 but not paying mortgage insurance
  • With her leftover savings she was able to buy a bunch of new furniture for her new place, and even go on an overseas holiday to Mexico.

Help this is all confusing

If you are a wanting to get a guarantor home loan or buy a home speak with one of our experienced mortgage brokers to walk through the next steps with you.
At Hunter Galloway we help home buyers get ahead in this competitive market, we give you the actual strategies that have helped other home buyers like you secure a property when there have been 5 other offers on the table! Enquire online or give us a call on 1300 088 065