Pros and cons of Guarantor Home Loans

As it becomes more and more difficult to break into the housing market, many families are considering the option of a guarantor home loan – generally used when parents provide their house as guarantee for a child’s loan. Basically, if you haven’t succeeded in saving enough for a deposit, another property can be used as equity in order to secure the loan. This is a serious financial step and not one to be taken lightly, so let’s look at the pros and cons of making this decision for your family. 

The pros
 

Enter the property market sooner

If you are impatient to be in your own home, or if you are confident that your financial situation will become healthier further down the line, you only need a smaller deposit to have your loan approved.

Avoid Lender’s Mortgage Insurance

If your deposit is less than the 20% threshold, you are usually liable for lender’s mortgage insurance as risk protection for your lender. However, when you have a guaranteed loan, the additional cost of this insurance could be reduced or waived.

Access to lower interest rates

The security of the guarantee will give you greater flexibility and choice when you are applying for a loan. With a smaller deposit, you could only secure a loan with high interest, making it even more difficult to make any progress on repayments. However, some lenders will not approve interest only repayments for a guaranteed loan, as you need to pay off the principal to remove the guarantee.

A temporary measure

Once you have repaid a certain amount, you will have enough equity to remove the guarantee so your guarantor is no longer liable for your loan. 
 

The cons
 

High risk to the guarantor

There is one primary con to the guarantee home loan. If you default on your repayments, your guarantor is liable for the portion of the loan they have guaranteed. This means their own home is at risk.

Your mortgage broker can help you calculate your repayments in advance, so you can be confident that you will be able to stay on top of the loan. You can also take the precaution of only using the guarantor for a portion of the loan, so you can free your guarantor from responsibility as soon as that portion is repaid.

A guaranteed loan can be a great way to help a younger family member embark on the journey towards homeownership. However there are significant risks involved, so this option should not be undertaken lightly, and you should always seek independent financial advice.

If you would like to know more about whether a guaranteed loan is the right option for your family, contact us today for a free consultation.