Purchasing your first home is a thrilling milestone. There’s nothing quite like the exhilaration of hearing that settlement has been completed and that you now own your own home.

For many aspiring homeowners, saving up for a deposit can be a significant hurdle. However, if you’re struggling to accumulate enough funds, there are alternatives to help you move into your first home sooner. One such option is a guarantor loan.

A guarantor loan involves a close relative, often a parent, using the equity in their property to provide additional security for your home purchase. This approach is becoming increasingly common.

Research from Digital Finance Analytics reveals that the number of first-time buyers seeking parental assistance soared from 3% in 2010 to 59%, with the average deposit loan amount rising from $23,000 to $107,000.

Here’s what you should know about guarantor loans before you proceed.

Why Opt for a Guarantor Loan?

Typically, buying a property requires a 20% deposit. For many, saving this amount can be challenging, especially with today’s high cost of living. A guarantor loan can offer an alternative route into the property market, potentially allowing you to purchase a home with no deposit at all.

Additionally, having a guarantor may help you avoid Lenders’ Mortgage Insurance (LMI), which is usually required if you borrow more than 80% of your home’s value. LMI protects the lender in case of loan default.

Who Can Be a Guarantor?

Generally, a guarantor is a close family member, such as a parent, grandparent, or sibling, who is willing to use the equity in their property to support your loan application.

Equity is the difference between the market value of their property and the amount they still owe on it.

How Does a Guarantor Loan Work?

A guarantor does not need to provide any cash at settlement. Instead, they agree to use part of their property’s equity as additional security for your loan.

For example, if you want to buy a $600,000 property and have saved a 10% deposit of $60,000, you would need a total deposit of 20%, or $120,000, to avoid LMI.

If your parents agree to use $60,000 of their home equity as security, you can cover the deposit and avoid LMI. They are not required to make payments at settlement, but if you default on your mortgage, they may be liable.

Once you’ve built enough equity in your home—through mortgage repayments or an increase in property value—your guarantor can be released from the loan (though fees may apply).

Risks to Consider

Before opting for a guarantor loan, it’s crucial to weigh the risks. If you fail to make repayments, your guarantor could face financial consequences. Additionally, their equity will be tied up in your property, which could impact their ability to sell or refinance their own home.

Combining family and finances can also introduce complexities. It’s advisable to seek legal and financial advice before proceeding with a guarantor loan.

Ready to Explore Your Financing Options?

If you’re eager to buy a property but haven’t yet saved a 20% deposit, a guarantor loan might be a viable option. Contact your 1^st Street Mortgage Broker today to discuss the benefits and potential drawbacks of guarantor loans, and understand the various lender requirements.