What is a Guarantor Home Loan and How Does it Work?

So, you don't have enough of a deposit today to get into the property market. 

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Because of that, you only have one choice and that is: “I've got to wait another 12 to 18 months before I can save enough to be able to purchase an investment property.”

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Well, there's something else that you can do that allows you to get into property today, and I'm going to show you exactly how it works in:

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• A step-by-step guide; and
• A case study.

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This will bring it all together in a nice little package so that you can understand it and implement it as fast as today. 

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So if you're interested, definitely keep reading.

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Getting Into Property Market

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We all know at this point that you either need:

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• A 10% deposit; or 
• You can get into a property at 20%.

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So you say: “Well, okay, on a $500,000 property, 10%, which is the minimum amount that I could probably get in with, is $50,000.”

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Now, depending on when you're reading this and how old you are, $50,000 could sound like a lot, or it could also sound like it's not that much.

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The reality is: That’s what you need to get into a property, BUT that only covers the deposit. You also need to cover the upfront costs and if you can't pay for these things, it doesn't matter if you've got a deposit or not.

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To buy a $500,000 property, you probably need $50,000 for the deposit.

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You also need funds for additional fees such as:

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• Stamp Duty;
• Legals;
• Inspections; and
• a buyers agent (if you’re using one).

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All of that could probably come to about $30,000 to $35,000.

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So realistically, you need about $85,000 to actually buy a property for $500,000.

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Now you might be thinking: “Well, okay, I've just saved $50,000, and now you're telling me I have to save another $30,000 to $40,000? That's going to take me another year! And if I wait 12 months in this current market, that $500,000 property could be worth $550,000. So now I'm having to pay more while being out of the market. I don't really want that option.”

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So what I'm going to introduce to you is a concept that people are using today to get into the property market a lot faster. Yes, everything in life comes with risks.

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Now, I want to break down exactly what the pros are and then what the cons are, and see if it's something that's suitable for you.

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What is a Guarantor Loan?

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Now you may have heard of the term "guarantor loan."

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You probably heard it and thought: “I have no idea what that means,” and then continued on with your day.

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For others, you may have heard it and thought: “I have no idea what that is, but I want to know more,” and so here, enters Ravi into the chat.

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A guarantor comes from the word “guarantee.”

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So, what it effectively means is that: Someone else is going to guarantee the deposit amount so if you have a shortfall of the deposit, the guarantee is coming from somewhere else.

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Now, that probably makes no sense, so I'm going to show you an example right now:

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Let’s say, for instance, you want to purchase a $500,000 property. 

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You would need:

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•  $50,000 as a deposit; and 
•  Additional $35,000 to $40,000 for expenses.

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At the moment, if you only have $50,000, that's only going to allow you to pay for the fees or the deposit.

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But let's say, for instance, you have close relatives. Let’s assume they are your grandparents, parents, or siblings who already have a property or a family home that has grown in value over time, or maybe they have held it for a while, or have paid down some of the debt.

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For example:

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• You are living in Sydney or Melbourne.
• The family home is there and it's worth $1 million.
• The debt amount on that property is $500,000, 

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This means: The equity, which is the market value MINUS the deposit, would mean a $1 million minus $500,000, giving us $500,000 worth of equity that's just sitting there.

How Does Guarantor Home Loan Work?

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Now, you can't just go to the bank and say, "Hey, there's $500k in equity, and some guy on YouTube told me I could access that. So give me my money!"

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It doesn't work like that. Here's how it actually works:

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1. Go to the bank.

2. Fulfil their servicing criteria: In the bank's eyes, you should be able to take out that loan, but for you to be able to do so, you should be able to service the repayments on it.

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Now, banks don't give you 100% of the equity so what they say is: Usable equity is very different.

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• 100% of the equity would be $500,000
• 90% of the equity would be $450,000
• 80% of the equity is $400,000

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Most lenders will give you 80%, which means $400,000 in this case. So if you can service this loan, you can go to the bank, take out the $400,000, and buy more investment properties.

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Let's say your parents are willing to help but don't want to purchase any investment properties themselves. 

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Instead of taking out the $400,000 equity available, they will guarantee the $100,000 that you may want to put towards your property, which would be a 20% deposit or they could even go in and give you a 10% deposit. Either they give you $50,000 or $100,000, it doesn’t really matter, but it allows you to substitute your own cash for that money. No cash transaction occurs; it's all managed in the back end. 

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The bank will say: “Okay, I’m guaranteeing $100,000 from your family home into this property that you are purchasing as an investment.”

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Now, the $50,000 you've saved can be used for fees, allowing you to get into a property today.

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If you've been living in the family home for the last 10 years, chances are that property has grown in value and the debt on it has been reduced so there should be a significant amount of equity available.

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There are two main options:

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Option 1. Your parents can use the equity to build their own property portfolio, taking retirement seriously for themselves.

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If they don’t want to do the first option:

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Option 2. Your parents can lend the money in the form of a guarantor loan to you, enabling you to start building your own property portfolio.

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Opportunity Cost

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Now, it's important to consider all the tools available to us, as well as the expertise that’s out there, because the biggest cost here is opportunity cost.

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If you think, "I want to do this all myself. I'll figure it out," then yes, you could. 

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You could spend time:

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• Educating yourself;
• Building confidence;
• Speaking to agents;
• Learning the market; and 
• Figuring out where to invest.

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All of these take time. It will be as simple as this example that I will use, because it is so relevant to me just recently. 

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Consider this analogy: if I want a cold-pressed juice, I have a few options. 

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Option 1. I could go to the shops and buy one.

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Option 2. I could go to a café where it's made fresh in front of me.

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Option 3: I’ll make it myself with a cold-press juicer at home. 

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Now, let’s go to the 3rd option. If I choose to make it myself, I have to:

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• Invest time (which means I’m not going to get the juice as soon as I want);
• Buy ingredients (which means more time for me); and most importantly
• Clean up (by the time I get to this point, I won’t even know if I still want juice or not).

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VERSUS…

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If I go to the shops and buy one, I don’t know what’s in there. There might be preservatives added in the juice because it needs to have a higher shelf life. 

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INSTEAD…

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If I choose to go to a café with the best machinery and someone who does it 10 times a day, the chance of them getting the ingredients right for the cocktail that I really want is going to be so much higher than me simply going out there and doing it myself. 

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This is effectively why some people rapidly build their property portfolios and I know this because I see people who are literally going out there, doing it themselves and then come back 12 months later and say: “Yes, I bought one property, but I want to buy more now,”

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Versus some of the clients that we have that go and say: “I’ve got four properties in the last 6 months, and I want to continue moving,” and all of this compounds because we know that time in the market is more important than timing the market. If you can manage both, you'll get a rocketship that could take you anywhere. 

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With a guarantor loan, you can start today without needing a deposit. However, this may not work for everyone, that’s why it's essential to seek financial advice.

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PS: You cannot constitute this as financial advice. You need to go and seek that with a financial expert. 

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If you're interested in this approach and your parents have equity that they don’t have an idea how it works, you have options. 

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Option 1: You can go to a bank, which offers only one option.

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Option 2: Consult a mortgage broker. 

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We have an in-house mortgage broking team; email us at team@searchpropertyau.com.au for assistance.

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Now, we've covered the biggest pro or advantage of using a guarantor loan which is: You can get started today. 

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You might have thought you would have to wait 12 months, but now you can potentially buy not just one, but even two properties.

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So what are the cons? 

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Biggest Disadvantage of Guarantor Loan

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The biggest con is: Purchasing the wrong property.

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This means: The equity from your parents' home is stuck in your property and you can't do anything about it. 

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Or even worse, you might find yourself unable to make your repayments. 

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You might think, "Okay, I don't need the deposit; I've got the deposit covered."

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However,

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• You don't have the right spending habits;
• You don't have the right saving habits; and
• You don't know how to mitigate risks. You go out there, take out a loan that you can’t afford. 

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Now, if unfortunately, you can’t make the repayments, the guarantor, who is guaranteeing the loan, will be forced to make your repayments.

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If this is a route you decide to take, you need to understand that you must be very disciplined with how you make your repayments and you need to have confidence. 

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If you are the person that’s giving guarantor loan to someone else, you need to ensure that:

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• This is the right option; and
• They have shown enough discipline for you to have confidence to be able to execute something like this.

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The Best Parts of This Process:

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1. It's super easy to implement if you have the right people.
2. No cash is actually being transacted, making it simple and clean.

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Another benefit is that, let’s say you buy that property today, and over the next three years, the property grows by $100,000. 

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Now, what happens next?

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Well, you can then go to the bank and release that guarantor loan! 

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This allows:

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• Your parents or your sibling, whoever provided the guarantor loan, to be released from that property, returning them to their original position; and

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• You to get into the property market faster or help your sibling or your kids do the same. It  also means that within a couple of years, you can have all that equity available to go again and repeat the process.

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If you need any help, book a free discovery call with my Search Property team.

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I hope you guys have enjoyed this video and found value in it. If you need someone to help you with this process, then share this article. I'll catch you in the next one!

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Thanks, guys!

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