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 of how a guarantor home loan works
Let’s say that you want to buy a place costing $500,000. You have saved a deposit of $50,000. That’s equal to 10% of the property’s value.
Unless you have a deposit of at least 20%, or $100,000 in this example, the lender will ask you to pay LMI. Instead of waiting to save an additional $50,000, a guarantor home loan can offer a solution.
We’ll say a guarantor offers $50,000 of their own home equity as extra security for your loan. This will give you the 20% security you need to buy the property today without paying LMI.
The guarantor isn't required to make any payments on your loan. But if you can no longer keep up your repayments, the lender will turn to the guarantor to make the repayments. In this way, it’s possible to get a home loan even when you have a small deposit.