How a guarantor can help you enter the housing market
Are you short of the equity needed to buy a home? With a guarantor, you can still get the home loan you need.
What is a guarantor for a mortgage?
A guarantor is someone who guarantees all or part of theYour home loan. This is usually someone you have a close relationship with, such as parents or other close family members. For the bank, the guarantee provides additional security, and for you, it can make it possible to obtain a loan even if you do not have full equity.
Being a guarantor is a significant commitment. The guarantor guarantees that the loan will be repaid, and must ultimately pay it themselves if the borrower is unable to do so. With a guarantor, the bank therefore gains additional peace of mind, which can make it easier to obtain a loan even if you do not necessarily have all the Equity required for the property purchase.
Secured guarantee
The most common way to act as a guarantor is what is known as a mortgage guarantor. In this case, one's own property is used as security for another person's mortgage. Many parents choose to help their children enter the property market in this way. Since they have often paid off large portions of their own loan, they have available equity that the bank can take as security.
A person can also act as a guarantor by providing security with funds in an account. The account with funds can then be locked until the home loan is repaid to the agreed amount.
How much equity you need for your home purchase
To buy a home, you usually need to have 10% of the purchase price in equity.
This means we can usually lend you a maximum of 90% of the funds for your home purchase. By adding together the size of the loan you can receive plus your equity, you can work out the maximum amount you can spend on a home.
Many young people lack the equity to buy their own home. Therefore, several parents act as guarantors to cover the shortfall in equity.
How much can you borrow with a guarantor?
How much you can borrow with a guarantor depends on several factors, such as income, debt and how much equity you have. A guarantor provides the bank with additional security, and this can make it easier to obtain a loan if you lack equity.
However, it must be taken into account that you must be able to service a loan, considering both interest rate increases and the rule that you can borrow a maximum of five times your own income. The guarantor does not necessarily increase your borrowing capacity based on your income, but can help you obtain a loan without having to have all the equity available.
Parents as guarantor: Helping children enter the housing market
Anyone can be a guarantor, but most often it is parents who act as guarantor for their children. For many young people, this is the only way to enter the housing market, especially in areas with high property prices that require substantial equity.
It is important that you as guarantor are familiar with the borrower's ability to pay. You must be able to trust that the person you are guaranteeing for can repay the loan, so that you do not end up having to pay yourself.
At the same time, it is important to remember that acting as guarantor, regardless, gives you less freedom to take out loans for yourself – for example if you wish to change property, buy a cabin or help another child enter the housing market.
Remember that there are also other Ways to help children enter the housing market, both in savings, monetary gifts and advance inheritance, or as co-borrower.
Alternatives to guarantor
If a guarantor is not an option for you, there are other ways to obtain a mortgage.
- Get a co-borrower: You can take out a loan together with another person. This could be, for example, a parent, sibling, partner, or a friend. It has become more common than before to buy a home with a friend loan. A co-borrower is equally responsible for the loan as you are.
- Personal loan: Many parents take out a personal loan to help their children meet the equity requirement.
- Giving cash gifts or an advance on inheritance, are among the most common ways parents choose to help their children enter the property market. This can be a good solution if you have a strong financial position and wish to help your children with their home purchase.
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