How will having a guarantor help your loan application?
If you don't have enough deposit but do have the ability to make the required home loan repayments, a guarantor could help you to secure additional funds to buy a home.
Saving a deposit can be daunting and very hard to do when you're also paying rent. By having a guarantor, you may be able to borrow the full purchase price and sometimes even the costs associated with purchasing property. This varies across lenders - some will still insist that you contribute some of your own equity towards the purchase, even if you have a guarantor.
Another benefit of having a guarantor is that you may save thousands of dollars by avoiding Lenders Mortgage Insurance (LMI). Generally LMI is required for home loans where you have less than 20% deposit i.e. the loan is greater than 80% of the value of the property. LMI is a type of insurance which lenders take out to cover the additional risk of high Loan to Value Ratio (LVR) lending. Although this insurance covers the lender against the risk of you defaulting on your loan, you pay the premium.
The amount of the guarantee depends on the individual lender's policies. The guarantee can vary from the full loan amount to as little as 20% of the loan (where the loan is for 100% of the purchase price).
After you've built up equity in your property, your guarantor can ask to be released from the loan. The timeframe to achieve this varies depending on the original deposit, the number of extra repayments made and whether your property has appreciated in value over the time period.
Depending on the lender, you may be required to pay some additional fees to release your guarantor. This can include a fee for the lender to revalue the primary security property as well as lender discharge fees.