No deposit doesn’t mean no home loan

I’m going to make a wild assumption and guesstimate you’re an unabashed rule breaker, and you dance to the beat of your own drum. I like people like you. Perhaps you’ve just started up your own business, and you’ve dedicated all of your financial power into getting that baby up and running.

Or maybe you’re free-spirited nomad, and you’ve spent the past 5-10 years fulfilling the Australian right of passage of fleeing to Europe. It’s been a good decade of fresh, greasy croissants, wild dance parties in Berlin and music festivals without the heat stroke.

Either way, you’ve found yourself with a collection of memorable experiences…but no real savings. You’re approaching an age where share housing just doesn’t gel with your sanity, and you want a permanent place to hang your hat and finally practice all that you’ve learned on The Block.

Home loans had never been on your agenda when you were snorkeling off the coast of Mauritius…but now? You’re apprehensive about saving and your HECS debt makes your stomach hurt. Where on earth will you score the necessary $45,000 to get a home loan when you owe the government two thirds of your yearly salary?

No deposit? Why getting a guarantor mortgage is your best bet

Generally, lenders need a deposit of around 10% of the cost of the mortgage. This will cover a 5% deposit plus fees like stamp duty and mortgage insurance, and it also demonstrates that you’re able to show financial discipline. After all, it takes a while to save up for a deposit, and a good saving habit shows you mean business.

Buuut…you’ve just come back from Europe, and you’re all cute with your stories of frolicking around the French countryside, but your savings for your dream home? That terrace in Rose Bay won’t be yours any sooner if you stick to building vision boards. You need a plan B.

And this is where a guarantor steps in.

Guarantor home loan to the rescue!

Guarantor home loans explained

If you don’t have a deposit for a home loan, a guarantor is someone who steps in and says “I got this.” And then you owe them your life. Kidding! Essentially, they’ll put their property up as collateral on your mortgage application. Also known as a family guarantee home loan – because who else is willing to put their neck on the line for you? – it’s one of the ways that young people can enter the property market sooner, and avoid the often costly Lenders Mortgage Insurance (LMI). If you don’t have a guarantor, you’ll end up paying an LMI which can be tens of thousands. Banks take out this insurance to cover them when the home loan is more than 80% of the property. Meaning you end up paying more money.

Gross.

Banks still need to know that you can afford the loan on your own. They won’t look at the guarantor’s income to help you, just their property as additional security for your loan.

By now you’ve probably guessed that being a guarantor is huge responsibility. You’re smart, and you’re very right. If the worst should happen and the bank can’t get money out of you, your guarantor – that’s usually mum and dad or the grandparents – are the ones who’ll cop the fall. Although you might think you’ll be entirely capable of making your mortgage repayments, if you do happen to default on your loan, you’re putting your guarantor’s equity on the line, too.

This is where risk-mitigation comes in.

Limited guarantee

When I help out my clients with securing a guarantor mortgage, I try to get their loans structured so that the risk is minimised and we can get their guarantor’s neck off the line as quickly as possible. We do this using a limited guarantee. This means your guarantor will only be liable for a percentage of the full amount borrowed, rather than 100% of your mortgage. And as soon as you’ve paid off that percentage (your limited guarantee – usually around 20%), we can release them.

It’s a great way for parents to step in and help those they care for without jeopardising their assets.

Income protection

Just because mum and dad or aunty Jill has offered up 20% of their property to help you buy your dream beach house in Bondi, doesn’t meant it won’t matter if you can’t afford to pay back the loan. You’re great, but truthfully…you’re not invincible. Redundancies suck, but they happen to the best of us. Illness can strike even the most enthusiastic juice cleansers, and accidents occur even for the most cautious amongst us. If you fall sick or become seriously injured, you might not be able to work. A 3-month Netflix binge sounds glorious, right? Unless your work is super generous with sick leave, they’ll only cover you for a short time. If sick leave can’t cover your full term of recovery, income protection can. I will also help you get set up with loan protection insurance which helps protect you – and importantly, your guarantors!

For the travelers, the newly divorced or those just getting back on their feet financially, a guarantor home loan is a viable option for borrowing the full 100% amount of the purchase price. And when structured correctly, it could help you score that stylish new boutique apartment in Paddington a whole lot faster.

Did you know that there are huge differences between different lenders and their guarantor loans? A mortgage broker can help you navigate the confusing process of mortgage applications.

My services are completely free of charge. Talk to me today – I could help you get your dream home without the paper work headache!