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 pledge loans.
They use what is known as 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.
This is a very popular way of first home buyers entering the property market. 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. Paul Gilhooly
This approach provides would be home buyers with three key advantages:
- They can enter the property market sooner as they don’t have to wait for months or years to save a deposit
- They avoid lenders mortgage insurance costs
- They require less savings to enter the market
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