If you’d like to apply for a home loan but don’t have enough deposit saved or maybe don’t have any deposit saved, it’s likely you’ve wondered ‘can you use a guarantor for a mortgage?’ The short answer is yes, you certainly can use a guarantor for a home loan under certain circumstances.
This will involve your guarantor using a portion of their home as collateral in lieu of a deposit. Generally, the guarantor will need to demonstrate they could assist in making repayments in the event the borrower is unable to. To help you work out whether a guarantor home loan is right for you, we’ve taken a look at different guarantor loan types and how you can borrow with no deposit or use a guarantor loan to avoid paying mortgage insurance.
Want to discuss using a guarantor for mortgage in person? Contact Oak Tree Finances today for a consultation about ‘can I use a guarantor for a mortgage?’ with one of our mortgage experts.
Can You Use a Guarantor for a Mortgage?
What is a Guarantor Home Loan?
A guarantor home loan allows a family member to act as a guarantor for your loan. This means that if you’re unable to pay back your loan, your guarantor can be called upon to take responsibility of payments. A guarantor will have to have equity in a property that they can offer as collateral for your loan, which serves as security for the lender if you fail to meet payments.
When is a Guarantor Used for a Home Loan?
A guarantor home loan is typically used when the person borrowing money has no deposit at all or has some deposit but less than a 20% deposit saved. In the situation where no deposit at all is available the borrower can borrow 100% of the price of the property and they can also borrow extra money for property purchase costs such as stamp duty and Legal Fees.
Another advantage is that a guarantor loan does not require Lenders Mortgage Insurance (LMI), which is payment required if the minimal deposit of 20% cannot be met. Some borrowers have a deposit of less than 20% and could get a loan but still use a guarantee to avoid paying this fee. For example, if you want to buy a $300,000 home and only have a 10% deposit of $30,000 saved, your guarantor can offer $30,000 of their home value as equity. This will lower the loan to value ratio (LVR) to 80% and makes it achievable for a person to secure a loan with a no mortgage insurance payable and a guarantee is only required for the small portion of $30,000 of the loan.
Can I Use a Guarantor for a Mortgage? What are the Different Types of Loans Available.
The four most common guarantee home loans include:
Family Pledge Home Loan Guarantee
When it comes to using a guarantor for mortgage, this one is the most common as it involves a family member offering a portion of their property as equity.
Security Guarantee
If you’re a first homeowner with a good credit history but have not been able to save enough deposit, your guarantor can use a portion of their own property as equity. If your guarantor is still paying off a mortgage, a bank may take a second mortgage as security.
Security and Income Guarantee
If you don’t have enough deposit saved or enough income for mortgage payments, a bank may take a portion of the guarantor’s home as security, as well as some of the guarantor’s income. This option is generally only available in a spousal relationship.
Limited Guarantee
A limited guarantee involves the guarantor offering to cover a part of the loan. This type of guarantee is used to limit the risk to a guarantor’s property.
Using a Guarantor for Home Loan: Can You Remove a Guarantor?
A guarantor can be removed from the mortgage when the guarantee owes less than 80% of the mortgage and has shown they’re able to consistently meet repayments. If you owe more than 80%, it’s still possible to remove a guarantor but you have to pay LMI and refinance your mortgage.
What Happens if a Guarantor Sells Their Home?
If your guarantor plans on selling their home, a bank may request the guarantee portion be deposited into a term deposit account as security. If the guarantor has lined up to purchase a home at the same time they sell, the guarantor mortgage can be transferred. However, it’s worth talking to your bank before doing this process, as there’s quite a bit of paperwork involved.
We hope our article on ‘Can you use a guarantor for a mortgage’ has answered your questions. If you’d like more information about using a guarantor for home loan, contact Oak Tree Finances today by calling 0404 403 066 or by filling out our online form.