Article published 23 August 2021
Purchasing your first home can be a long journey, in some instances you may have found a home that is within your borrowing potential, however you are yet to save up a 20% deposit.To avoid paying lenders mortgage insurance (LMI), if this is the case, you may still be able to borrow the higher amount without a 20% deposit by having a guarantor on the loan.
Having a guarantor can offer several benefits to first home buyers. Guarantors are especially useful in the case of a small deposit, as providing a guarantor can potentially mean reducing or completely avoiding the cost of lenders mortgage insurance (LMI).
While a guarantor can help you purchase your first home with a smaller deposit, due to their upfront contribution, it is important to keep in mind that as the borrower, you will be responsible for your loan repayments. Therefore you will need to be able to service the entire loan with your income.
How much can you borrow with a guarantor?
While a guarantor can help you in your home buying journey, having a guarantor does not mean that your borrowing power will increase. Your borrowing power can be determined by taking into account your income and expense to understand the amount of a loan you can service with your financial circumstances.
For example, if you wish to purchase a $400,000 property and only have a deposit of $20,000. This loan would have a Loan to Value Ratio (LVR) of 95%, which would incur LMI, if approved. However, if a family member is willing to provide a guarantee for the home loan, using the equity in their own property as additional security, the LVR would reduce and avoid the need for LMI.