One option for people who are unable to save enough of a deposit is to use a guarantor for their home loan. For example, say James has only saved a 5% deposit. Let’s also say James’s parents have paid off their home. If James’s parents pledge the other 15% of the deposit, he then has a 20% deposit.
The purpose of this article is to give you some background on guarantor home loans as well as some of the pros and cons. I’ll then show you the one situation where I’m comfortable doing a guarantor home loan with a client.
James’s parents go guarantor on his home loan. James saves thousands of dollars in lenders mortgage insurance (LMI). He has saved thousands in LMI because he had a full 20% deposit instead of only a 5% deposit.
A few years later, James has paid off a proportion of his home loan. Jame’s parents no longer have any responsibility toward their sons mortgage. James saved thousands in LMI.
James’s parents house:
Wants to buy a house for $500,000 in Victoria as a first time home buyer.
Has a deposit of $47,000 (which covers the 5% deposit plus lenders mortgage insurance of roughly $18,000)
How it works:
Yes, provided they have paid off their home, or an investment property. They will need to get legal advice and meet any other requirements set out by the lender.
Not anyone can go guarantor. The main people are direct family members. Here’s a list of who can usually go guarantor: