Renting can be tough.
Basically, you’re forking out dead money every week/month on a place that is never going to be yours, no matter how much you pay.
So, what’s the alternative?
Well, you could always buy a house of your own, but with housing prices being the way they are, and with pretty much all your available capital going on rent, it becomes difficult, if not impossible for you to raise the deposit.
So, what do you do? Do you resign yourself to a lifetime as a non-homeowner? Or start playing Oz Lotto every week in the hopes of scoring a big win?
Well, you could do that, but we certainly wouldn’t advise it. Instead, we’d suggest that you look into a guarantor loan and whether it is a suitable option for you.
WHAT IS A GUARANTOR LOAN? (OR WHY IT PAYS TO BE NICE TO YOUR FAMILY)
Basically, a guarantor loan is when someone else (usually a kind and loving family member) puts up their property as collateral instead of you paying a 20% deposit or a deposit at all. Think of it as a kind of security guarantee.
By using a guarantor, you can take out a home loan without incurring the usual 20% deposit requirement.
This allows you not only to get into the property market sooner, but to avoid the additional payment of Lenders Mortgage Insurance. (LMI)
HOW DOES A GUARANTOR LOAN WORK?
Basically, the guarantor uses the collateral in their home to cover a portion of the loan. Usually the amount needed to reduce your loan-to-value ratio (LVR) to 80%.
Just to be clear, they don’t actually give you or the lender any money. Instead, they use their house, or a part of it, as a pledge of your ability to repay the loan.
This is a big commitment on their part, as they are effectively staking their home to help you get one of your own. So, you might want to consider being extra nice to them for a while.
HOW CAN THE GUARANTOR PROTECT THEMSELVES?
There are things a guarantor can do to mitigate the risk. They may be able to build a clause into the agreement, whereby they get removed from the loan agreement once the property has earned sufficient market value.
Alternatively, they may be able to get a lender to allow a limited guarantee. This means that your guarantor can stand as security for a defined portion and not the entire property. This grants them reduced liability on the mortgage.
SO, SHOULD I GET A GUARANTOR LOAN OR NOT?
Pros:
You can get yourself a property even without having the requisite deposit.
You don’t have to spend months/years scrimping and saving to raise the money.
You can get into a property quickly and begin paying off the loan immediately.
You don’t have to get caught up in the potential complexities of Lenders Mortgage Insurance.
Cons:
Your family member could be liable for the loan.
They could, in the worst-case scenario, be forced to sell their house.
Family ties could be put under enormous strain if things go awry.
SUMMARY
Here at Contour Finance, we believe that a guarantor loan is a practical and smart way to give yourself a leg up into the housing market. But only if it’s suitable to you. That’s why it is essential that all the concerned parties consider every eventuality, (however remote) and always consult with a lawyer before proceeding.
Contact our team at Contour Finance to find out more or get the process started. We’ll give you the right advice to make sure that whatever you do, you’re safe as houses.
That’s our guarantee!
