How a Guarantor Can Help You Buy Your First Home

Buying your first home can feel like a distant dream, especially with rising property prices, high-interest rates, and increasing living costs. However, one way to make that dream a reality is by using a guarantor for your mortgage. A guarantor, often a parent or close family member, can help you access the property market sooner and potentially reduce some of the costs associated with buying a home. But what does this mean for you, and how does it work?

What is a Guarantor Mortgage?
A guarantor mortgage allows you to use another persons property as additional security for your home loan. This doesn’t mean they’re buying the home for you or making your payments; instead, they’re offering part of their property as security to help you avoid Lender’s Mortgage Insurance (LMI) and possibly secure a lower interest rate. Essentially, it can help you get into your new home sooner and with less upfront cash.

How Can a Guarantor Help You?
There are several ways a guarantor can assist you in purchasing your first home:

1. Avoiding LMI Costs: LMI is an insurance premium you might need to pay if your deposit is less than 20% of the property’s value. By having a guarantor, you can potentially avoid this cost altogether, making your home purchase more affordable.

2. Lowering Interest Rates: With the additional security provided by a guarantor, lenders may offer you better interest rates. Lower rates mean lower monthly repayments, saving you money over the life of the loan.

3. Increasing Your Borrowing Power: A guarantor can also help increase the amount you’re eligible to borrow. This could be particularly useful in a competitive market where you need extra funds to secure your desired property.

How Does a Guarantor Mortgage Work?
A guarantor mortgage can be structured in several ways, depending on the lender and your specific situation:

1. Partial Guarantee: Your guarantor provides security for a portion of the loan, typically around 20%. This helps you reach the necessary deposit threshold and avoids LMI without making your guarantor liable for the entire mortgage amount.

2. Full Guarantee: In some cases, the guarantor might cover the entire amount above what you can provide as a deposit. This can be particularly helpful if you have little savings but have good income and a guarantor willing and able to help. However, this option can increase their financial risk, so it’s important to discuss this carefully.

Is a Guarantor Mortgage Right for You?
Using a guarantor can be a great way to enter the property market sooner, but it’s essential to consider the implications carefully:

– Understand the Risks to Your Guarantor: While a guarantor can help you avoid extra costs and potentially lower your interest rates, it’s crucial to understand the risks they’re taking on. If you severely default on your mortgage payments, your guarantor could be responsible for covering the outstanding debt. This could put their property at risk if they are unable to cover the payments in an extreme situation..

– Consider Your Financial Stability: Before asking someone to be your guarantor, assess your own financial situation. Are you in a stable job? Do you have a reliable income? Can you comfortably afford the mortgage repayments? Ensuring you can meet your repayments will protect both you and your guarantor from financial strain.

Steps to Take Before Using a Guarantor
1. Discuss with Your Family: Open communication with your potential guarantor is crucial. Make sure they fully understand what being a guarantor entails, including the risks and responsibilities.

2. Seek Professional Advice: It’s always a good idea to speak with a mortgage broker to explore your options and understand the best way to structure a guarantor loan. At AXTON Finance, we can provide you with tailored advice to suit your situation.

3. Legal and Financial Consultation: Encourage your guarantor to seek independent legal and financial advice. This ensures they’re fully aware of their obligations and the potential impact on their finances.

4. Plan for the Future: Have a plan for how you’ll release your guarantor from their obligations. This could be through repaying the loan to below 80% of the property’s value or refinancing when your financial situation improves.

Alternatives to a Guarantor Mortgage
If you or your potential guarantor are uncomfortable with the risks involved, consider other options:

– Saving for a Larger Deposit: While it might take longer, saving for a larger deposit can reduce or eliminate the need for LMI and lower your loan amount, making repayments more manageable.

– Co-Borrowing: Instead of a guarantor mortgage, consider co-borrowing with a family member. This means both of you are responsible for the loan and can share the repayments. However, this option also comes with its own set of complexities and risks.

– Financial Gifts: Your parents or family members could gift you the money needed for a deposit. This would reduce the amount you need to borrow without tying their property to your loan.

Get Started with AXTON Finance Today
Navigating the complexities of buying your first home can be challenging, but you don’t have to do it alone. At AXTON Finance, our team of experienced mortgage brokers is here to guide you every step of the way. Whether you’re considering a guarantor mortgage or exploring other options, we can provide expert advice tailored to your needs. Contact us today to learn more about how we can help you achieve your homeownership dreams while protecting the interests of both you and your family.