Saving for your first home in this current climate is more challenging than ever – with the cost of living going up, wage growth down, and house prices continuing to increase, it can seem impossible!

In addition to those challenges, it takes time, and sometimes taking time can mean you get priced out of the suburbs you might want to look at purchasing in.

There are numerous different strategies you can deploy to purchase your first home, and today we’re here to talk about the use of a guarantor loan.

What is a guarantor loan?

A guarantor loan, simply put, is when a family member offers the use of the equity in their own home as additional security for the loan you take out. Using a guarantor loan can also help in reducing the deposit required (in some cases, not needing a deposit at all). 

The other benefit to this type of loan arrangement is that you can avoid The cost of Lender’s Mortgage Insurance (or LMI) which can mean saving thousands of dollars.

How does a guarantor loan work?

Let’s assume you want to purchase a property for $450,000; it could be a townhouse or something in a suburb you like. Over the last few years, you’ve managed to save a deposit of $45,000 which represents 10% of the home’s value.

If you do not have a minimum 20% deposit, or $90,000, you will be required to pay LMI. You can, of course, opt to pay for the LMI insurance, or you can decide to wait and continue saving – they are two options available; however, neither are ideal. 

This is where the guarantor loan offers a solution – if you have a family member willing to act as a guarantor on your loan and offer $45,000 as extra security to purchase your property without incurring the cost of LMI. 

Will the guarantor have to pay anything?

For this solution to work, you’ll need to have a family member willing to do this for you; however, should they say yes, they are not liable for any payments on your loan. They will have to make repayments if you can no longer keep up with your repayments. 

The guarantor will also need to own their own home and have equity in it. Some of this equity then becomes part of the security for your home. If you’re not across what equity is, it’s simply the difference between what is owing on the loan and the property’s value.

Becoming a guarantor is a significant decision. Everyone needs to be on the same page – should you fail to pay your loan, your guarantor will be liable, which could cause stress on your relationship with a family member.

At MAW Money, we always recommend that anyone considering assisting by becoming a guarantor seeks qualified legal advice – and this is something most responsible lenders will insist on anyway.

If you would like to discuss your options for purchasing your first home with a guarantor, please feel free to reach out to us today.