Buying a home in Brisbane can feel overwhelming, especially with rising property prices. For many first-home buyers, gathering a large enough deposit is a major challenge. That’s where the expertise of a mortgage broker can make all the difference.
Guarantor home loans are a popular solution for those struggling to secure a loan independently. A mortgage broker can help by guiding you through the loan process, finding the best lenders, and ensuring you understand your borrowing options.
Whether you’re stepping onto the property ladder for the first time or trying to boost your borrowing power, this guide will walk you through everything you need to know about guarantor home loans in Brisbane.
What is a Guarantor Home Loan?
A guarantor home loan involves a third party, typically a family member, who offers up additional security to help you secure the loan. Rather than a cash payment, the guarantor uses their home equity to guarantee part or all of the loan. This makes lenders more comfortable offering you the funds without needing a large deposit.
How Guarantor Home Loans Work
As mentioned, a guarantor home loan usually involves a family member using their home equity as additional security for your loan. This helps you borrow more or avoid Lenders Mortgage Insurance (LMI) if you have a small deposit. The guarantor doesn’t pay cash but pledges part of their property’s equity.
If you default on the loan, the guarantor may have to cover the portion they guaranteed.
Here’s a sample breakdown of how it works:
Sample Breakdown
If you’re buying a home for $600,000 with a 5% deposit of $30,000, you’d normally need $120,000 (20%) to avoid LMI. With a guarantor:
- Purchase Price: $600,000
- Deposit: $30,000
- Guarantor's Security: $120,000 (20% of the purchase price)
- Loan Amount: $570,000
Without a guarantor, you'd face LMI costs of around $15,000. The guarantor’s liability is capped at the portion they guarantee, not the entire loan.
Brisbane's 2024 Outlook: How Guarantor Home Loans Are Advantageous in Today's Property Market
Brisbane’s property market continues to grow, with property prices rising around 7% in 2024, according to CoreLogic. As the market heats up, guarantor home loans can give buyers a significant advantage, especially for first-home buyers struggling to save a large deposit.
Why Guarantor Loans Are a Smart Choice in 2024:
- Property Price Growth: As property prices rise, so does the required deposit. A guarantor loan can help buyers get into the market sooner without needing a full 20% deposit.
- Avoiding Lenders Mortgage Insurance (LMI): LMI costs can be thousands of dollars. By having a guarantor, you avoid this cost entirely, which is especially important in a rising market where every dollar counts.
- Increased Borrowing Power: In a competitive market, higher borrowing capacity can make the difference between securing your dream home and missing out. A guarantor loan can boost your borrowing limit without needing genuine savings.
- Favourable Interest Rates: With a guarantor, lenders may offer more competitive interest rates, giving you better terms than you’d get with a smaller deposit or lower equity.
- Entering the Market Sooner: As property prices continue to climb, waiting to save a larger deposit might mean paying more later. A guarantor loan allows buyers to enter the market now, locking in at today’s prices before they rise further.
Types of Guarantor Home Loans
There are several types of guarantor home loans designed to meet different needs and situations. Here’s a breakdown of the most common options:
Family Guarantee Loan
This is the most common type, where a family member (usually a parent) offers their home’s equity as additional security for part of the loan. This reduces the need for a large deposit and helps avoid Lenders Mortgage Insurance (LMI).
Limited Guarantee
In this option, the guarantor’s responsibility is capped at a specific amount or percentage of the loan (e.g., 20% of the purchase price). This helps limit the guarantor’s risk while still providing extra security for the borrower.
Family Pledge Loan
Similar to a family guarantee loan, a family pledge loan allows the guarantor to pledge their savings or equity without handing over cash. The guarantor’s equity acts as collateral, allowing the borrower to increase their borrowing capacity.
Security Guarantee
This type allows the guarantor to use their property as loan security, but only for a set portion of the loan. Once the borrower has repaid that portion or the property increases in value, the guarantor’s obligation is released.
Each type of guarantor loan comes with different levels of risk and responsibility, so it’s essential to understand which option suits both the borrower and the guarantor.
Eligibility for a Guarantor Home Loan
To be eligible for a guarantor home loan in Brisbane, both the borrower and guarantor must meet specific lending criteria.
Borrower Requirements:
- A stable income and proof of income
- A good credit score and clean credit history
- Ability to meet regular mortgage repayments
Guarantor Requirements:
- Ownership of a property with sufficient equity
- Good credit rating
- Permanent residency or citizenship
Some banks may also have additional loan requirements, such as minimum loan amounts or maximum loan-to-value ratios (LVRs). It’s important to discuss these factors with an experienced mortgage broker to understand which loan products are available to you.
Chat with Zest Mortgage Solutions
Want tailored advice? Chat with our team at Zest Mortgage Solutions today. We’re here to make sure your guarantor home loan process runs smoothly. Call us on (07) 3461 6499 or visit Zest Mortgage Solutions to get started.
Case Study: How a Guarantor Loan Helped Jane Buy Her First Home
Jane, a first-home buyer in Brisbane, had a stable job with a decent salary but hadn’t built up much of a deposit. Property prices were increasing quickly, and she was struggling to save a 20% deposit while also paying rent.
Her parents owned their home outright and offered to be her guarantor, using their equity as security for her loan. This allowed Jane to avoid paying LMI, saving her around $15,000. With her parents' limited guarantee in place, she was able to buy a home for $700,000 with just a 5% deposit. Now, she’s living in her new home, making regular mortgage repayments, and her parents’ liability decreases as she pays off her loan.
How to Increase Chances of Guarantor Loan Approval
Securing a guarantor home loan can be a game-changer for buyers in Brisbane, but getting loan approval isn’t automatic. There are key steps you can take to improve your chances and meet the eligibility requirements.
Check Your Credit Report and History
Lenders will review both the borrower’s and the loan guarantor’s credit report before offering a guaranteed loan. Ensure that your credit history is clean, and if needed, work on improving your credit approval chances by reducing outstanding debt and keeping up with any existing loan repayments.
Meet the Eligibility Criteria
To be an eligible buyer, you need to meet the lender’s eligibility criteria, which include proof of stable income, manageable entire debt, and a good credit score. Your loan guarantor will also need to meet specific eligibility requirements, including having enough equity contribution in their own property.
Consider Debt Consolidation
If you have multiple debts, consider debt consolidation to streamline your payments and reduce your monthly obligations. A simplified debt consolidation strategy can make you more appealing to lenders and improve your overall loan terms.
Understand the Types of Guarantor Home Loans
Different lenders offer various types of guarantor home loans. Some provide limited guarantees where the guarantor only covers part of the loan, while others might cover the entire debt. Knowing the type of loan that suits your situation and the guarantor’s risk appetite can help smooth the loan process.
Have a Plan for Loan Repayments
Show lenders that you have a solid plan for loan repayments. A detailed budget demonstrating how you’ll manage the mortgage can significantly boost your chances of loan approval. Lenders want to see that you can meet the ongoing financial obligations without relying too heavily on your guarantor.
FAQs
Can anyone be a guarantor?
No. Guarantors are typically close family members with sufficient equity in their own property.
What happens if the borrower defaults?
If the borrower defaults, the guarantor may be required to repay the guaranteed portion of the loan.
How much can I borrow with a guarantor loan?
You can usually borrow up to 100% of the purchase price or more, depending on the lender and your guarantor’s equity.
Can I remove the guarantor later?
Yes. Once you’ve paid off enough of your loan or your property has increased in value, you may be able to refinance and remove the guarantor.
Does a guarantor loan affect my credit score?
Yes. Both the borrower and guarantor’s credit score may be impacted if repayments are missed.
Do all banks offer guarantor loans?
No. Not all lenders provide guarantor loans, so it’s essential to work with a loan specialist who understands which banks offer the best terms.
What are the benefits of a guarantor loan?
The primary benefits are avoiding LMI, borrowing more, and entering the property market sooner.
What is the risk that comes with a guarantor home loan?
The main risk of a guarantor home loan is that if the borrower defaults, the guarantor may be responsible for repaying the guaranteed portion of the loan. This could put the guarantor’s property at risk if the borrower can’t meet their mortgage repayments.
Conclusion
Guarantor home loans can open the door to homeownership sooner, especially in Brisbane's growing property market. By understanding how they work and what’s involved for both borrowers and guarantors, you can make a confident decision that benefits everyone.
If you’re ready to explore your options or need expert advice, the team at Zest Mortgage Solutions is here to help. Give us a call at (07) 3461 6499 or visit Zest Mortgage Solutions to get started on your home loan journey.
