Let's face it - it can be pretty difficult for first-home buyers to save a 20% deposit to put into the purchase of a house.
If you feel priced out of the market right now and are thinking about alternative options to fund your first home, there is an option to rely on a third party to provide the 20% deposit.
This option is called a "guarantor home loan"! Let's dive into it a little deeper!
So what is it and how does it work?
When you are saving for a deposit on your first home, putting together that down payment is tough but of course there are ways to speed up the process!
With a guarantor home loan, you may only require a very small deposit - or in some cases, you may not need a deposit at all!
That is because a guarantor, usually parents or some other close family member, offers some of the equity within their own home to act as additional security for your loan.
It really is that straight forward!
There is ultimately some additional numbers and workings that come into play but the general gist here is that a guarantor offers the bank some of their home equity which the bank takes into consideration rather than a cash deposit.
How will a guarantor help your home loan application?
By having a guarantor, you may be able to borrow the full purchase price of the property and sometimes even costs associated with purchasing the property, such as stamp duty. This varies across banks and lenders - some will insist that you still contribute a certain amount of your own money, even if you have a guarantor.
Another massive plus - a guarantor can save you THOUSANDS of dollars by helping you to avoid LMI (Lenders mortgage insurance) which is a type of insurance that lenders take out to cover themselves against the risk of defaults on home loans. LMI is generally required for home loans where your deposit is less than 20% of the price of the property you are wanting to purchase.
What are the requirements for guarantor home loans?
For majority of lenders, your guarantor will have to be a close family member and they must also be a homeowner!
The guarantor must also have sufficient equity in their home in order to make up the guaranteed portion of your home loan. This equity is what will make up the security for your home loan.
In some cases, lenders will also require the guarantor to take responsibility for the full guarantor home loan if you stop paying back your own debt. For this reason, lenders will often assess the income of the guarantor and require copies of their pay slips and other documents.
Lastly, banks will require the guarantor to seek independent legal and financial advice before committing to being a guarantor and will request a statutory declaration to be made that the guarantor has sought out, received and understood this advice.
At Rockstar Finance, we have helped more than one hundred homeowners purchase a home including many first home buyers who have utilised their parents' generosity and jumped into the property market with a guarantor home loan.
If you want to get an idea of how a guarantor home loan may apply to your situation, contact Rockstar Finance today for a free discussion so that we can help you determine if a guarantor home loan is a viable option to purchase your first home.