When you are first home buyers, it can be difficult to come up with the initial deposit. Instead of missing out on the home of your dreams, sometimes a Guarantor Loan might be the answer. 

If you do decide to go down this road, the guarantor needs to ensure they are financially capable of paying off the loan if the borrower finds they can no longer do so. The guarantor also needs to be in a strong financial position and have enough equity in their own home.

This could mean that first homeowners get into the property market sooner rather than having to wait to save for the deposit.

Here is a list of pro's and con's that should be considered by you and your family:

Pros for you:
- Higher chance of being approved as it's out of Lender’s Mortgage Insurance territory
- You may not need to have a deposit
- Discounted interest rates may be available from some lenders as the loan value ratio is lower
- You won’t need to pay Lender’s Mortgage insurance
- You can borrow more, as you don't have any Lender’s Mortgage insurance to finance
- Limited liability for the guarantor
- You can get into a home of your own sooner 

Cons for the guarantor:
- The loan process may take longer
- The fees may be higher as there is more than 1 property involved
- If the borrower can't make the repayments then the guarantor has to pay back the entire debt
- Limited access to lenders
- The bank will need to take out a 2nd mortgage on the guarantors home if the property is encumbered

Here is a short case study outlining how family guarantees can get buyers into their own home sooner:
“Matt and Natasha had found their perfect first home. However, there were a few hurdles. They didn't have the money for a deposit, also Matt had previously defaulted on his credit card and he had also recently lost his job. Of course, they struggled to get finance approval.

Rather than miss out on the house they wanted, Natasha's parents bought it and rented it out to tenants for 12 months to give the couple time to figure out their finance.

During this time the couple submitted a number of applications in the hope that they could buy the property from their parents, but, with Matt only employed in his current role for a short time, no deposit, and those recent defaults, they continued to be rejected.

They had nearly given up hope and started thinking it just wasn't going to happen and that they would have to wait for their bad credit to clear. But in one final attempt, they approached a Finance Broker and explained their situation.

Their Finance broker researched a number of lenders and looked into the possibility of Natasha's parents acting as guarantors. They had a lot of equity in their own properties, so were in a strong position to help.

Most lenders had cast doubt over the couple's chances and rejected any possibility of getting a loan approved, but the finance broker found one lender that was willing to have a look at the application.
The finance broker presented every bit of information possible and explained why the defaults occurred and what had been done since to resolve them and make sure it didn't happen again. The application was then approved!

Naturally, Matt and Natasha were very pleased to be able to purchase the property from Natasha's parents, who were also over the moon at seeing the plan work out.

In the end, the couple didn't even have to pay Lender’s Mortgage insurance. They have since followed their finance broker's plan to work their way out of a specialist lending product into a prime loan and have refinanced to take advantage of a more competitive rate. They are looking forward to paying off the mortgage faster and renovating the property.”

Sometimes it is just a case of looking at all the options and seeing which one fits your client.

NB: Names have been changed to protect the clients' privacy.

Source: FinanceCorp