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What are guarantors for a mortgage and guarantor home loans?

A guarantor loan can help first home buyers buy a place of their own even with a small deposit. Here’s what you need to know about a guarantor home loan.
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What are guarantors for a mortgage and guarantor home loans?
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What is a guarantor?


What does a guarantor on a mortgage do?

Saving a decent home-buying deposit can be difficult… especially if you’re renting. But there is a solution that could get you over the line sooner - having a ‘guarantor’.

Watch this short video to find out what a guarantor is, and how they might help you get into your own home, sooner.

  • A guarantor on a mortgage is the person who provides the additional security for your home loan. Most lenders prefer the guarantor to be a close relative – usually a parent, grandparent or siblings.

  • Your guarantor doesn’t need to provide any cash payment. No money changes hands with a guarantee.

  • Some lenders will allow extended family members and even ex-spouses to be a guarantor for your loan. This varies depending on the lender.

  • The guarantor agrees to offer part of their home equity to top up your cash deposit. In this way, a guarantor home loan can let first home buyers buy a place of their own far sooner. 

How a guarantor loan works

When it comes to buying a first home, saving a deposit is hard work – and it takes time. 

A guarantor home loan works as a way to get into the market sooner. You may only need a small deposit. In some cases, you may not need a deposit at all.

That’s because a guarantor – usually a family member, offers equity in their own home as additional security for your loan.

A guarantor home loan can also be a way to avoid the cost of lenders mortgage insurance (LMI). It’s a saving that can be worth thousands of dollars.

Example of how a guarantor home loan works

Let’s say that you want to buy a place costing $500,000. You have saved a deposit of $50,000. That’s equal to 10% of the property’s value. 

Unless you have a deposit of at least 20%, or $100,000 in this example, the lender will ask you to pay LMI. Instead of waiting to save an additional $50,000, a guarantor home loan can offer a solution. 

We’ll say a guarantor offers $50,000 of their own home equity as extra security for your loan. This will give you the 20% security you need to buy the property today without paying LMI.

The guarantor isn't required to make any payments on your loan. But if you can no longer keep up your repayments, the lender will turn to the guarantor to make the repayments. In this way, it’s possible to get a home loan even when you have a small deposit.

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Guarantor guide

If you are thinking of using a guarantor or becoming one yourself, it's crucial to do your research. This guide walks you through the important considerations to think through.


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Guarantor loan requirements

To be eligible for a guarantor home loan, you will need to have a family member willing to act as guarantor. 

The guarantor will also need to be a home owner. That’s because their home equity forms part of the security for your first home loan. Home equity is the difference between the value of their property and the balance remaining on their home loan. 

Agreeing to be a guarantor is a big decision. If you cannot keep up the repayments on your loan, the lender can ask the guarantor to pay off your home loan.

That’s why anyone who is considering being a guarantor for a home loan should seek independent legal and financial advice before accepting the role. Most lenders will insist on this, prior to accepting a guarantee.

How will a guarantor help your application

If you don't have enough deposit but do have the ability to make the required home loan repayments, a guarantor could help you to secure additional funds to buy a home.

Saving a deposit can be daunting and very hard to do when you're also paying rent. By having a guarantor, you may be able to borrow the full purchase price and sometimes even the costs associated with purchasing property. This varies across lenders - some will still insist that you contribute some of your own equity towards the purchase, even if you have a guarantor.

Another benefit of having a guarantor is that you may save thousands of dollars by avoiding Lenders Mortgage Insurance (LMI). Generally LMI is required for home loans where you have less than 20% deposit i.e. the loan is greater than 80% of the value of the property. LMI is a type of insurance which lenders take out to cover the additional risk of high Loan to Value Ratio (LVR) lending. Although this insurance covers the lender against the risk of you defaulting on your loan, you pay the premium.

The amount of the guarantee depends on the individual lender's policies. The guarantee can vary from the full loan amount to as little as 20% of the loan (where the loan is for 100% of the purchase price).

After you've built up equity in your property, your guarantor can ask to be released from the loan. The timeframe to achieve this varies depending on the original deposit, the number of extra repayments made and whether your property has appreciated in value over the time period.

Depending on the lender, you may be required to pay some additional fees to release your guarantor. This can include a fee for the lender to revalue the primary security property as well as lender discharge fees.

Example of avoiding LMI due to guarantor providing security

Say you wish to purchase a $400,000 property and will need to borrow $380,000. This loan has an LVR of 95%, which means you'd need to pay Lenders Mortgage Insurance (LMI).

If a family member is willing to provide a guarantee for your home loan, using the equity in their own property as additional security, the LVR would reduce and you'd avoid the need to pay LMI, saving you approximately $11,600.

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FAQs

Becoming a guarantor can often help your loved ones realise their property dreams sooner. However, it pays to fully understand the risks and responsibilities before agreeing to take on this role.

Common questions about becoming a guarantor

As a guarantor, you allow the equity in your own property to be used as additional security for the loan being taken out by your child or relative. The primary security for the loan will be the property being financed, but the lender will also take a mortgage over your property.

This mortgage will not support the loan directly but will be used to support a guarantee from you, as the guarantor.

While becoming a guarantor can seem like the right thing to do for your loved ones, you need to fully understand the risks involved before signing up.

As a guarantor, you effectively offer to take on responsibility for the home loan if repayments can't be met. So, it pays to consider how you would cope financially if the unexpected happens, and the lender turns to you to make good on the loan. Your own financial wellbeing could be compromised - at worst, you could risk losing your own home.

It is also important to note your own ability to borrow will be reduced after you have agreed to act, so consider carefully your future plans and finance options.

The big plus for home buyers is the extra security a guarantor provides. It means you may be able to secure a home loan with just a small deposit – or even no deposit at all. It could also mean avoiding Lenders Mortgage Insurance – a saving that can run into thousands of dollars.

The lender will still check you can comfortably manage the loan repayments, but having a guarantor can fast-track you into a place of your own.

The role of a guarantor is generally limited to the immediate family members of those seeking finance. Normally, this would be a parent but guarantors can include siblings and grandparents. Some lenders will allow extended family members and even ex-spouses to be a guarantor to a loan, but this varies depending on the lender.

Your local Mortgage Choice broker can help you understand which lender best suits your needs.

Plenty of lenders offer guarantor home loans. They come under a variety of names including ‘family pledge loans’. A guarantor home loan doesn’t have to come with a higher interest rate. In many cases a guarantor loan will have the same rate as a regular home loan.

The main point is to be sure the loan is right for your needs. After all, interest rates can change. But the features of a guarantor home loan will remain in place regardless of rate movements.

The lender will still check that you can comfortably manage the mortgage repayments, but a guarantor home loan can fast-track you into a place of your own.

Each lender works differently, but in many cases you can nominate how much of the loan you're prepared to guarantee, and how long you wish to act as guarantor for. When deciding these elements, it's worth making a realistic assessment of the borrower's financial track record and job security, even if you are comfortable that the borrower is well-equipped to manage a home loan.

Often in these situations, emotion may cloud your financial judgement so it is vitally important that you seek independent legal and financial advice before accepting the role - in fact, most lenders will insist on this prior to accepting a guarantee.

A security guarantor will stay on your mortgage until your loan is refinanced, special arrangements with your lender are in place or the loan is paid off. In some cases it is possible for a guarantor to request a release from the loan in circumstances where you have built enough equity in your loan and have shown a history of servicing your mortgage repayments. The time frame for this can obviously vary as this can take a number of years depending on the original loan amount, loan type, repayments made and whether the property’s value has increased.

In some cases, depending on your lender’s specific policy and the terms of the loan, you may need to pay additional fees when requesting to release the guarantor. 

Typically the guarantor is not able to be released until you have built up equity in your loan of at least 10% or 20% to avoid paying LMI, though this can vary depending on lender requirements. 

When releasing a guarantor this will usually require an internal refinance. You can build the equity on your loan by making extra repayments to bring the loan balance down quicker or looking at ways to increase your property’s value.  

It’s important to understand that depending on lender requirements, releasing a guarantor involves refinancing your loan and can’t be done automatically, therefore your lender may need to review your financial situation during the refinancing process.

With a guarantor mortgage, you can borrow funds to purchase a property with a small deposit, under 20%, and avoid paying LMI. In some cases, you may be able to get a home loan with no deposit at all using a guarantor. 

It is best to speak with your Mortgage Choice broker, who can go through your situation and understand how much you can borrow with a guarantor.

As you can see, there's much to weigh up, and it's definitely worth speaking with us about becoming a guarantor. We understand the different requirements of each lender and will cut through the clutter to find the loan that suits your needs, as well as the needs of your loved one.