How a guarantor can help you secure finance

When you’re desperately trying to save up a deposit for a home and just see the prices of property climbing and climbing, it’s difficult to remain patient. But there is another way: a guarantor can help.

If you don’t have a substantial deposit for a home loan, there are still a number of ways to obtain credit. These are known as family pledges and there are two types available to borrowers: service guarantees and security guarantees.

Service guarantees are less common than security guarantees, explains MFAA-accredited credit adviser and Co-Founder of Constantia Finance, John Ganderton. These involve a family member guaranteeing all of the repayments on a loan, as well as potentially having to be named on the property title.

“A drawback of this approach is that it usually means first home buyers are not entitled to any government grants,” John explains.

A more popular option is a security guarantee. Borrowers who have a limited deposit sometimes use this approach. In this situation, a relative or friend (usually a borrower’s parent or parents) is prepared to use the equity in his, or her, own home to guarantee the deposit of the borrower.

For example, for a total loan amount of $600,000, in a security guarantor situation the borrower/s would take on the debt of 80 per cent of the value of their loan, which would be $480,000, in their own name/s.

The loan for the balance, $120,000, is then guaranteed in the names of the guarantor/s and borrower/s, limiting the guarantor’s liability while providing security for the lender, meaning that lender’s mortgage insurance is not necessary.

“This is a very popular way of first home buyers entering the property market,” says John. “It works well when borrowers don’t have a substantial deposit, but their parents own their own home. It’s a great option as long as the parents are comfortable with their child’s ability to pay back the loan.”