Going guarantor on a home loan

A home loan with a guarantor is a type of loan arrangement where someone else, usually a close family member, supports your home loan application by using part of their home equity or cash savings as security to help cover a deposit shortfall.

This may make it easier to get approved for a home loan if you have a deposit of less than 20% and, in some cases, help you avoid paying lender’s mortgage insurance (LMI).

However, it does mean the guarantor takes on some risk. If you default on your home loan and are unable to meet your home loan repayments, they may be required to cover the guaranteed amount, including any interest or charges that may apply. To limit this risk, most guarantors choose to guarantee only part of the loan rather than the full amount. For example, on a $400,000 home loan, a guarantor’s liability could be capped at $60,000 (15% of the loan), plus any associated interest or costs, while the borrower contributes the remaining 5% deposit.

This means that if the borrower can’t keep up with repayments, or if the property is sold for less than the outstanding loan balance, the guarantor is only responsible for the guaranteed amount – not the entire loan.

A mortgage with a guarantor works much like a regular home loan, except a family member uses some of the equity in their property as collateral on your loan. Some lenders refer to this type of arrangement as a Family Security Guarantee, Family Guarantee or a similar name.

This may help if you’re buying with less than a 20% deposit because the guarantor’s property is used as extra security. However, it does not reduce the amount you need to borrow. If you have not saved a full deposit, your loan may be larger, which could mean higher repayments.

Over time, as you build enough equity in your property, you can usually apply to have the guarantor removed from the loan.

To show you how that might look in practice, here’s a simple example:

Let’s say Sarah wants to buy a home worth $400,000. She has saved $20,000 (5% of the purchase price), and so would normally need $80,000 to reach a 20% deposit and avoid paying LMI.

Sarah asks her parents to act as guarantors. They agree to use $60,000 of equity in their home as additional security.

With the family home guarantee in place, Sarah may be able to buy the property without paying LMI and enter the market sooner. However, her parents still take on some financial risk if she fails to keep up with her repayments.

Over time, as Sarah pays down her loan and her equity grows, she may be able to remove the guarantor once her loan falls below 80% of the property value.

Yes, first home buyers may be able to use a guarantor to get a home loan with as little as a 5% deposit, or sometimes even no deposit, by using a family member’s home equity as extra security. This may help you get into the property market sooner and, in some cases, avoid paying lender’s mortgage insurance (LMI).

Depending on the lender and loan type, you may also have access to home loan features such as an offset account, redraw, or flexible repayments.

But before choosing a guarantor option, it’s important to discuss the risks with the person you’re asking to be your guarantor. They need to fully understand their financial responsibility if things don’t go to plan. The lender will typically insist that the guarantor seeks independent legal advice before making a final decision on the arrangement.

Not always. With a guarantor, you may be able to get a home loan with little to no deposit. In some cases, you may be able to borrow up to 100% of the property price, or even up to 105% to cover extra costs such as stamp duty and legal fees.

This is because the guarantor’s home equity serves as additional security for the lender. But borrowing more can mean higher repayments and more interest over time, and you’ll still need to meet the lender’s serviceability checks.

Yes, you can usually refinance to a new home loan from a home loan with a guarantor if you meet your bank’s lending criteria for refinancing to the new loan. If you’re still not eligible for a regular home loan, you won’t be able to refinance your guarantor home loan just yet.

Depending on your lender and the home loan products they offer, you may be able to take out an investment loan with the help of a guarantor. However, you’ll have to enquire with your mortgage broker or the lender to find out what kind of investment home loan options they have available to a prospective borrower with a guarantor in tow.

A suitable home loan with a guarantor comes down to what type of guarantees are available with the lender, and if that fits your and your guarantor’s financial situation. Not all banks offer ‘guarantor’ loans, and different banks take different approaches.

Here are some common guarantor arrangements to compare as you work out what may suit your needs.

• Family guarantee: It’s a common type of home loan arrangement where an eligible family member uses equity in their own property, or sometimes term deposits, as security to support your application. Eligibility rules vary by lender.
• Security guarantee: In this structure, the guarantor uses equity in their property as extra security on your home loan. It is a common option for borrowers with a smaller deposit.
• Limited guarantee: One of the most common and lower-risk options, where the guarantor only guarantees part of the loan rather than the full loan amount. This can help limit their risk.
• Security and income guarantee: A less common arrangement where the guarantor supports the application using both property equity and income. This may be used when the borrower doesn’t fully meet the lender’s serviceability requirements, such as young adults who are just starting out in the workforce and earning a lower income. Not all lenders offer this structure.

A guarantor on your home loan could help you buy sooner with a smaller deposit, but it can also create financial risks for both you and your guarantor if things don’t go to plan.

Here’s a quick look at some of the main pros and cons to consider before deciding if a guarantor arrangement is right for you:

In Australia, a home loan guarantor is usually the borrower’s close relative, who is financially secure enough to support the loan. Most lenders typically allow a parent or grandparent, a legal guardian, a spouse, a sibling, or a child aged over 18 to act as a guarantor.

Some lenders may allow a company or trust to act as a guarantor. However, the vast majority of guarantor home loans involve a person closely related to the borrower to cut the risk of complications.

The lender must be satisfied that the proposed guarantor meets certain financial and legal requirements. Being a close family member on its own isn’t enough, the guarantor also needs to be in a strong financial position to step in if the borrower is unable to service the mortgage.

In most cases, a guarantor will need to:

• Have sufficient equity in their property to service the portion of the loan being guaranteed, even if they still have a mortgage.
• Show adequate income and a suitable credit history, so they could step in if repayments can’t be met.
• Be an immediate family member, as this is what most lenders require.
• Be aged 18 or over, an Australian citizen or permanent resident, and living in Australia.

Yes, being a guarantor can impact your credit score. The loan will appear on your credit report, and if you and the borrower can’t meet the mortgage repayments, it may be recorded as a default. This can put a large dent in your credit score and can make it harder to obtain finance in the future.

Yes, it can. If you’re a guarantor on someone else’s home loan and they’re unable to keep up with their repayments, you may be required to step in and make repayments up to the amount you’ve agreed to guarantee. This can put pressure on your own finances and make it harder to meet your own mortgage commitments.

In some cases, depending on the property’s value, the lender may have the right to sell your home to make back the money they’re owed. This could leave you with a home loan to repay but no home, if the sale proceeds are less than the outstanding loan. It’s important to factor in these possibilities if you’re thinking about guaranteeing a loan for someone.

Yes, a guarantor can be removed from a home loan once the borrower has built up enough equity and meets the lender’s requirements. In many cases, this happens when the loan-to-value ratio (LVR) falls to 80% or less through extra repayments, property value growth, or both.

A guarantor may also be removed when:

• the home loan is paid off in full
• the property is sold, and the sale proceeds fully repay the loan
• the borrower refinances to a loan that no longer needs a guarantor
• the lender allows the guarantor to be released before the LVR reaches 80%, though this may mean the borrower needs to pay LMI

Keep in mind that a guarantor cannot be removed automatically. The borrower usually needs to apply, and the lender will assess whether the loan can stand on its own without the guarantee.

There may be fees involved in removing a guarantor and refinancing. However, some banks offer cashback incentives for refinancing, which can help offset some of these costs.

Speaking with our brokers and using our online home loan comparison service is 100% free. So give us a call today to learn more about your home loan options!