A guarantor home loan can be helpful for people who don’t have enough money saved to make up the 20% deposit usually required to take out a mortgage and avoid Lenders Mortgage Insurance. A guarantor is a third party (most commonly a close family member) who uses some of the equity they have in their property to provide additional security for your home loan.
How Does a Guarantor Help My Loan Application?
A guarantor offers up part of the equity in their property to provide the deposit required for your mortgage. Equity is the difference between the value of the property and the balance of their mortgage. If you only have a small or no deposit saved, this could provide the extra security the lender is looking for in order to offer you the loan.
Essentially, using a guarantor can also help you avoid Lenders Mortgage Insurance (LMI) which could save you thousands of dollars.
Who is Suitable for a Guarantor Home Loan?
A guarantor is most suitable for someone with a steady income, who can make mortgage repayments without assistance but who may not have enough saved up for a deposit. Usually, this is a first home buyer.
A guarantor can help someone break into the property market faster. Some lenders will require the home buyer to have at least 5% of the property’s value in savings, even with a guarantor.
There are a number of guarantor loan requirements. So make sure you talk to your lender about everything that’s involved in ensuring your eligibility for this type of loan.
How Do Guarantor Loans Work?
A guarantor loan works by the guarantor offering part of their home equity to top up your cash deposit; no actual cash transfer takes place in this scenario. With a guarantor, banks are willing to lend as much as 110% above the property value with competitive rates, without the requirement of Lenders Mortgage Insurance (LMI).
There are two different types of guarantor loans:
- Secured guarantee loans: This loan offers a little more protection to the guarantor in that it’s secured against the borrower's existing asset. This gives the guarantor a bit of leeway if the borrower defaults on their home loan repayments. Banks will pursue the borrower's asset first before going for the guarantor’s.
- Unsecured guarantee loans: This loan type is much riskier. It’s not secured against any asset of the borrower and in the case the borrower defaults on their mortgage repayments, banks will automatically seize the guarantor’s assets.
The guarantor will need to have enough equity in their own property to cover the required percentage of the new property’s value (usually at least 20%). The lender will take out separate loans over both the new property and the guarantor’s property. Depending on the terms of the loan, the guarantor may be required to pay the entire loan back if the borrower cannot.
Guarantor Loan Structure
Guarantor home loans require the guarantor to take on a certain amount of risk, so it’s important to carefully consider the structure of the loan beforehand.
There are a few ways a guarantor loan can be structured:
- Guarantee the whole loan: A guarantor can guarantee an entire loan, however, there is risk associated with this option. They may be required to pay the entire loan back if the borrower defaults on their mortgage.
- Guarantee 10% of the loan: A guarantor can provide a guarantee for only 10% of the loan to assist with avoiding LMI. This can occur through splitting a loan and providing a guarantee over only one of the split loans. The advantage of this is that the entire loan does not need to be repaid for a guarantor to be released.
- Guarantee then release: A guarantor can choose to be released from the loan once the borrower has enough equity to avoid paying LMI. For example, where the loan amount to property value ratio falls to 80% or below, a guarantor can exit with ease.
Scenario - Sam & Maggie
See how a guarantor loan works in practice.
For example, Sam and Maggie want to purchase a property worth $700,000. They currently have savings of $35,000 (being 5% of the property’s purchase price) and have sufficient combined income to service a loan of up to $700,000.
Normally, savings of at least $140,000 (being 20% of the property value) are required to obtain a loan and avoid paying LMI for this property. Given that Sam and Maggie need to borrow 95% of the property value, LMI will need to be paid on the loan on top of their usual home loan repayments.
Maggie’s parents own a property worth $1,000,000. They offer $105,000 of equity in their home to the bank as security for Sam and Maggie’s loan. Sam and Maggie can now borrow $665,000 without paying LMI — thanks to a guarantee, they‘ll save $30,000 to $35,000 over the life of their loan.
After five years, Sam and Maggie have repaid $120,000 of their loan principal. Maggie’s parents can be released as guarantors because the amount that they guaranteed has been repaid.
How Much Can I Borrow with a Guarantor?
You may be able to borrow up to 110% of the property’s value with a guarantor loan. However, some lenders will require you to have at least a 5% deposit.
You may need to speak to a mortgage broker to discuss how much you might be able to borrow with a guarantor loan.
Benefits of Guarantor Home Loans
The main benefit of guarantor loans is that it lowers the cost of entry for those with smaller deposits and allows them to break into the property market faster. Prospective homeowners could borrow the full amount of the loan without having to pay Lenders Mortgage Insurance because lenders view guarantor loans as extremely low-risk. Home loan applications with guarantors are also more likely to get approved, because they strengthen the application. On top of that, many guarantor loans have very competitive interest rates.
Guarantor loans may also enable you to borrow more than the value of your home. Of course, this depends on the lender and the purpose of the loan:
- First home buyer: 105% of the property value
- Construction: 105% of property value
- Debt consolidation and purchase: 110% of the property value
- Investment: 105% of the investment property value
- Refinancing: 100% of the property value
As a guarantor, you can choose to limit the size of the guarantee in order to minimise your risk. This means you would only be liable for a certain portion of the loan, above which the lender assumes the risk. This allows flexibility and reduces strain for the guarantor.
Risks of Guarantor Home Loans
The main risk of guarantor loans is any default on the part of the borrower could lead to banks taking possession of the guarantor’s property. The guarantor is legally obliged to repay the entire loan amount if the borrower cannot. This may involve selling the family home to service or clear the debt.
In this situation, the guarantor doesn’t have the right to demand that banks try to obtain payment from the borrower or to seize the borrower’s assets first; banks have ultimate discretion. However, in most cases, banks will take action against the borrower assets first before pursuing the guarantor.
Guarantors may also find it difficult to borrow again in the future, as their borrowing capacity will be restricted while the loan is outstanding. A guarantor also does not have any rights to own the property they guarantee nor do they receive any credit rating improvement upon repayment of the loan.
What Are the Requirements of a Guarantor Home Loan?
To be eligible for a guarantor home loan, you need to have a family member who owns a home and is willing to act as guarantor. Usually this will need to be a parent, sibling or grandparent, but some lenders will allow more extended relatives to be guarantors as well. The guarantor will also need to have enough equity in their home to cover the amount needed for the guarantee.
Borrowers must also provide evidence of their credit, expenses, income and employment history in order to prove that they will be able to repay the loan.
How to Get Approved for a Guarantor Loan
In order to qualify for a guarantor home loan, you must meet these requirements:
- Both borrower and guarantor must provide proof that they would be able to repay the loan - usually evidence of stable employment and income
- Both borrower and guarantor must be comfortable with the terms of the loan, as well as the regular repayment amounts
- Both borrower and guarantor will need to have a good credit score
- Borrowers must not have any other outstanding debts before applying
Even if you meet these requirements, your lender might have more specific conditions that you need to adhere to in order to qualify for this type of loan.
What Are My Options if I Can't Get a Guarantor for my Home Loan?
If you don’t have any family members who could act as guarantor, these are some other options that you could consider:
- Low deposit home loan - Some lenders will allow you to borrow up to 95% of a property’s value, but you will have to pay LMI. You can pay off LMI as part of your monthly repayments, but this could put a strain on your other finances.
- First Home Guarantee - This scheme allows first home buyers to take out a low deposit home loan without paying LMI.
- Co-buying - You may be able to take out a loan with your parents that you can pay off together.
- Family Home Guarantee - This scheme allows an eligible single parent to purchase a home with as little as a 2% deposit, regardless of whether they’ve owned a home before. Lender’s mortgage insurance is also not required.
- Rentvesting - If you can’t afford to buy the home you want to live in, you could invest in a property in a cheaper area to build wealth while renting somewhere else.
- Keep saving for a bigger deposit - If you’re determined to keep saving until you’ve got enough for a 20% deposit, this could be a good option.
How Joust Can Help
Joust can save you time by connecting you to suitable lenders and mortgage brokers that match up with your circumstances. If you have complex needs, our instant match service could help streamline the search for a lender who can help you get started on your home loan.
Will a Guarantor Home Loan Cost More?
No, in most cases a guarantor loan will not have a higher interest rate than a regular home loan, nor will you have to pay any extra premiums. You may be able to save money by avoiding lender’s mortgage insurance.
You may have to pay an additional fee when the guarantor is released from the loan.
When Can a Guarantor Be Released?
If the terms of your loan allow for it, the guarantor may be released once you’ve built up enough equity in your home to cover the cost of the guarantee. Usually, this is when the loan-to-value ratio is at 80%, meaning you’ve repaid 20% of the property’s value.
Releasing the guarantor may involve refinancing the loan. If this is the case, your lender may need to review your finances and arrange for an updated valuation of the property.
Can I Borrow 100% with a Guarantor?
In some cases, yes, you will be able to take out a guarantor home loan with no deposit at all. However, this will depend on the policies of the individual lender as well as the circumstances of both borrower and guarantor.
How Long Does a Guarantor Stay on a Mortgage?
A guarantor will stay on your mortgage until the loan is refinanced or paid off, unless special provisions have been made with your lender to release them sooner. If the terms of the loan allow it, a guarantor may be released once enough equity has been built in the loan to repay the amount of the guarantee. However, this will usually require that the loan be refinanced in order to release the guarantor.
A guarantor will usually remain on a mortgage for at least a few years, but the timeframe can vary depending on your financial situation.
Can I Use a Guarantor Home Loan for an Investment Property?
Yes, many lenders will accept investment loans supported by a guarantor. However, they are less likely to accept a no-deposit loan in these circumstances and will usually not allow you to purchase more than one investment property with a guarantor.