How does a Guarantor loan help a First Home Buyer?
Firstly, let’s look at why a Guarantor Loan has become more popular in recent years as a facility to assist First Home Buyers.
The lenders have changed their lending polices over the years and the government grants that have been abolished have also had a negative effect on some borrowers.
What has changed?
- Since the Global Financial Crisis in 2007-2008, every lender decided to withdraw their 100% loan facilities.
- The $7000 First Home Owner Grant and 100% stamp duty concessions from most states in Australia for established homes was abolished. In real terms, the average first home buyer in NSW who would have purchased a house at a value of $400,000 has lost OVER $20,000 in benefits, between the loss of the $7000 grant and the stamp duty that is now payable.
- If the same first home buyer in NSW was to purchase a newly built home, that has never been lived in or sold before, they are entitled to receive a $15,000 grant. They are also entitled to stamp duty concessions on a sliding scale. A lot of first home buyers simply cannot afford a loan to purchase land and then construct a home – especially if they must also pay rent whilst they are paying for a Construction Loan. Even if they can build, we will soon explain why a guarantor could or even should help in this situation.
- In addition to these changes, there may be several other factors that can prevent you from being able to save money, in order to pay the associated purchase costs, such as stamp duty, government costs, lender fees and legal fees and also the deposit needed.
If you are paying rent, personal loans, car loans, credit card debt or have any other regular payments to make, then you simply may not be able to save enough. This is where the family pledge type of assistance can help you.
Will it help me to have a family member guarantee my loan?
Possibly: The benefits of this type of loan are all based on the fact that your loan will be less than 80% of the combined security value. However, we will still need to assess your own circumstances to ensure that you have a good chance of having your finance approved. Once we know that your situation is viable we can provide a recommendation and then speak with the person that you wish to approach to be a guarantor.
Once the guarantor understands the process, and we have their permission to set up a guarantor home loan, then the bank would basically look at the value of the property that the applicant is buying and also the value of the property owned by the guarantor.
The bank calculates the combined property values and determines if the loan will be below 80% of these values. These calculations also take into account any loans that the guarantor themselves may have on their own property.
Providing that this criteria can be met, which we will establish when we do a preliminary assessment of the situation, then the actual loan application can now proceed.
This means that a lot of first home buyers who may not have been able to afford to build a home, will now be able to look at purchasing an established home as an alternative option.
If you are going to be building a home, this loan will also be beneficial to you with your construction loan. The main aim here is to avoid the lenders mortgage insurance costs and allow you a bigger choice of loans at better interest rates.
The benefits are as follows:
- You would not need a 5% deposit, which allows you to purchase a property sooner.
- You will save money immediately because there will be no Lenders Mortgage Insurance (LMI) costs payable. LMI is an insurance that the lender takes out to protect itself when a loan is over 80%.LMI protects the lender, not the borrower in the case of the borrower defaulting on their loan.Example: The mortgage insurance costs for a $400,000 purchase with a 95% loan ($380,000) would cost anywhere between $10,500 and $16,000 – that is the cost range depending on the lender. That is a serious saving by anyone’s standards. These calculations were done in February 2015.
- You will probably have a lower interest rate. Most loans at 80% will achieve a lower interest rate, than loans at 95%.Example: We see variances in the loan interest rate of up to 0.8% for the same loan with the same lender, the only difference being one is at 95% and the other at 80%. Let’s use a lower average of say 0.5%, on a loan of $380,000, this would represent a saving of $1,900 per year. ($57,000 over a 30 year loan term).
- You will more than likely be able to consolidate some minor debts if you have a guarantor.This is good for all concerned as you now have the ability to repay the home loan faster. This keeps the guarantor happy, because you are paying the loan off faster and you also have your financial life on track. It keeps the bank happy, because you are able to make your repayments easier. And obviously you will be happy because you have less debts to worry about. Most importantly, all additional savings made from paying out external loans (the payments) should be added to the mortgage repayments. Let’s use a car loan as an example. If the consolidated car loan repayment was $500 per month, then this amount should be added to the minimum mortgage repayment. This ensures that the car loan will not take 25 or 30 years to pay off.
- We have the option of asking for a Limited Guarantee. This releases the guarantor when your loan is down to 80% of your property value.
- Refinancing your loan before it is at 80% of the property value.If for some reason the guarantor needed to be released earlier than expected and the applicant’s loan was still above 80%, we can apply to refinance the loan into just the applicant’s name. This will more than likely incur mortgage insurance fees and should be looked at only as a last resort. This option must be discussed with your mortgage broker in order to know if it will be viable for you.
How can I apply?
These are your simple steps to apply for a Guarantor Assistance Loan.
- Contact us on the numbers above to speak to a mortgage broker, or complete our online enquiry form.
- You will speak with a broker who will take into account your needs by discussing not only your requirements, but also any concerns you have, and offer you some possible strategies and ideas that you may not have thought about.
- Once we know what you require, we will draft and email you a proposal– this will usually consist of a few options that are easy to understand.
- Once you have had a chance to look at what options are available, you can contact your broker or the broker will call you, to discuss the proposal.
- You can then decide if you wish to proceed or you may just want to discuss more options.
What are my other options?
There are many options available:
- Whether you are after a variable interest rate, a fixed interest rate, interest only loan, equity loan or any of the other loans available, it is important that you find out what is available to you before applying for a loan.
- The loans listed below are available for most lending purposes. Whether you are refinancing your home loan to a lower rate, or a property investor looking to buy that second or third property, we will have some ideas for you to consider.
- Even if you are a first home buyer purchasing a new home or renovating your existing home, there are some great deals available from the banks and lenders that we are accredited with.
- Please click on a link below to learn more about other loans that are available to you.