Guarantor

How does a guarantor loan work?

When it comes to buying a first home, saving a deposit is hard work – and it takes time. A guarantor home loan works as a way to get into the market sooner. You may only need a small deposit. In some cases, you may not need a deposit at all. That’s because a guarantor – usually a family member, offers equity in their own home as additional security for your loan. A guarantor home loan can also be a way to avoid the cost of lenders' mortgage insurance (LMI). It’s a saving that can be worth thousands of dollars.

Example

• Say you wish to purchase a $400,000 property and will need to borrow $380,000. This loan has an LVR of 95%, which means you'd need to pay Lenders Mortgage Insurance (LMI). If a family member is willing to provide a guarantee for your home loan, using the equity in their own property as additional security, the LVR would reduce and you'd avoid the need to pay LMI, saving you approximately $11,600.

What the guarantor needs to be aware of

• Know the risks of going, guarantor if you're thinking about guaranteeing a loan, make sure you understand the risks. Take the same care as if you were taking out a loan for yourself.
• Check the loan amount you are guaranteeing, and if the loan has been structured correctly. It's better to guarantee a fixed amount so you know exactly how much you might have to pay.
• Understand you will need to offer a security to the bank, preferably an investment property or an owner-occupied property that is almost paid off.
• Understand the loan contract before you sign a loan guarantee, get a copy of the loan contract from the lender ahead of time. Ask lots of questions so you understand the details.