A guarantor loan can enable you to buy an investment property without a deposit, but once you take on this type of debt, you should aim to pay it down quickly.
Blogger: Otto Dargan, director, homeloanexperts.com.au
You’ve been working hard for a while now and you’re bringing home the bacon. Great! You’ve decided now is the time to get yourself an investment property and you’ve found a nice house in a boom area. Even better!
There’s a problem: travelling, the high cost of living and too many impulsive eBay purchases have played havoc with your savings and you don’t have enough for a deposit.
Thankfully, your mum and dad may be able to help you out with a guarantor loan.
WHAT IS IT?
A guarantor loan is your best bet at buying a property with no deposit because it allows you to use the equity in another person’s property – usually a parent or close relative – as security to purchase a house of your own. It sounds pretty good, doesn’t it?
In fact, it’s now the only way to borrow the full purchase price plus costs, including that pesky stamp duty. That means you can borrow 105 per cent of the property value! While there are many lenders that can offer guarantor loans, there are only two or three lenders in Australia that will accept them for purchasing an investment property.
Many of the smaller lenders don’t offer guarantor loans at all.
Guarantor loans usually attract the best interest rates, coming in cheaper than a 95 per cent investment loan. In addition to this, you don’t have to pay lender’s mortgage insurance (LMI) – a one off fee that would normally be charged if you borrow more than 80 per cent of the purchase price.
Some lenders may lend you a little extra to consolidate a small credit card debt or to fund minor cosmetic renovations of the property. This can help you add value to your new investment before tenants move in.
A GUARANTOR IS NOT A GUARANTEE
To get approved, your parents’ property must be in Australia and they must be working or be a self-funded retiree. Pensioners are not normally accepted as a guarantor for an investment loan unless there are mitigating circumstances.
The amount of equity required in the guarantor’s property comes down to the value of the property you want to buy. It is possible for your loan to be approved even if your guarantor has a mortgage on their property.
A guarantor loan can only be used to buy one investment property, so most investors use it to get their foot in the door. Once they have built up some equity, they can refinance and buy more investments.
REDUCING YOUR RISK
Depending on the lender, your parents may not be required to guarantee the entire loan amount. This is known as a limited guarantee, and is typically around 25 per cent to 30 per cent of the loan amount.
Ultimately though, removing the guarantor as soon as you can afford to should be your number one priority. That means no more impulse buys, no new car and no trips overseas until you have paid down the loan and removed the guarantee.
Depending on your property picking skills, it usually takes between three and six years for extra repayments and growth in the value of your property to enable you to apply to remove the guarantee.
If your parents are thinking of putting their house up as security for you, it is important they seek appropriate legal and financial advice. Above all, you need to be conservative, invest prudently and look after your parents. After all, they looked after you.