Your first home. An exciting milestone, isn’t it? What’s not exciting is applying for a home loan in Sydney unprepared. High property prices. Large deposit requirements. Strict lending conditions. Getting your foot in the door requires overcoming these challenges. But worry not. There’s still one solution that can work for you. Enter guarantor home loans. They might just be your golden ticket.
Guarantor Home Loan Explained
You can get help from a family member through this loan. They offer part of their own home or savings as security for your loan. This means you may not need a full deposit. This is also what we mean by getting into the property market much quicker. That’s because you don’t have to wait too long for enough deposit savings.
Guarantors offer additional security for your loan. This also reduces the risk for lenders. And you can borrow the property’s value in full.
How Does It Work?
You will have two security properties to offer when you take out a home loan in Sydney with a guarantor. The first is the one you’re buying. The second is part of your guarantor’s equity. The majority will be secured against your new home. And a much smaller portion is secured against a part of your family member’s home equity. They will need to surrender their part if you default on the loan.
The guarantor doesn’t need to secure the entire loan. Their portion is only 20% of the loan. This is essentially the deposit.
Having a Guarantor Has Its Perks
Property prices in Sydney only seem to keep increasing. But you can get on the property ladder quickly with a guarantor. This beats waiting years to save for a deposit.
Next, you may be able to avoid Lenders Mortgage Insurance. So save yourself tens of thousands of dollars. LMI is needed when borrowers have an inadequate deposit (usually 20% of the value of the property). And it protects the lender, not the borrower. Skipping this additional expense makes homeownership a lot more affordable for first-time buyers.
Lastly, this type of loan can increase the amount you are able to borrow. This allows you to purchase a more appropriate property or one in a better location. This means you can borrow more, buy the house that suits you without a huge deposit and not overstretch your budget.
Risks for the Guarantor
Guarantor home loans benefit first-time buyers tremendously. But they do have their dangers. The most serious being for the guarantor. The lender will reach out to your guarantor to pay off their part of the loan if you stop paying. This is what puts their property at risk.
This necessity is why both parties must know the roles and liabilities associated with it. Guarantors need to ask themselves: are they going beyond their means for you? Seek independent financial advice and guidance prior to finalising this arrangement.
When is a Guarantor Home Loan a Good Idea?
There are two questions you must answer. The first one is can you stably afford paying monthly mortgage dues? The second one is do you have trouble saving for a large deposit? Is it yes to both? Then a guarantor home loan might be the right move. Doing so also helps you avoid paying Lenders Mortgage Insurance.
However, a loan with a guarantor isn’t for everyone. And if you are not confident you can make repayment or have a steady income, using a guarantor might cause undue stress to your family. Check your finances carefully. See what they look like before you even start considering this loan.
Common Mistakes to Avoid
Go over all the details with this type of loan because you might make mistakes. One of which is not setting up an exit plan. Remember that your guarantor isn’t tied to your loan indefinitely. So it’s important to have a clear strategy for releasing them from their obligation once your property gains enough equity.
Another one is underestimating the risks. Have an honest conversation with your guarantor about the potential consequences. Especially if you default on the loan. That’s because their property could be at risk if things go wrong. And this will likely strain relationships.
You may also make the mistake of not exploring other options. It’s best to consider alternatives first before you settle on guarantor home loans. Look into government schemes or first-home buyer grants that may help with your deposit.
Alternatives to Guarantor Loans
Does it seem like a guarantor home loan isn’t the right fit for your situation? There are other options to explore. First-home buyer schemes. Shared equity schemes. Low-deposit loans. These are alternatives that can also help you enter the property market without a guarantor. These alternatives may also come with less risk for both you and your guarantor in some cases.
Not sure about your options? Consult a professional. They can help find the solution that best meets your needs.
AFMS Group
First-time home buyer? We know the struggle. But we’re here to make securing a home loan in Sydney easier for you. We offer expert guidance to help you address guarantor home loan concerns and more. So, do you need help with getting started? Or are you looking for alternative solutions to your financing needs? We can assist. Allow us to help you figure out the right path to homeownership. Contact us today.