Guarantor Home Loan – What is it and how to get one?

For many Australians, buying a home can feel like a distant dream, especially when trying to save for a large deposit. A guarantor home loan offers a solution that can make homeownership more accessible for first-time buyers. This type of loan allows a borrower to secure a mortgage with the help of a guarantor, typically a family member, who provides additional security for the loan. By reducing or even eliminating the need for a deposit, this option helps buyers enter the property market faster.

However, before considering a guarantor home loan, it's crucial to understand how the arrangement works and the responsibilities involved. Both the borrower and the guarantor need to be aware of the benefits and risks. This article will provide an in-depth look at how guarantor home loans work in Australia, who qualifies as a guarantor, the advantages and disadvantages of this loan structure, and how a guarantor can eventually be released from the loan.

What is a Guarantor Home Loan?

A guarantor home loan is a type of mortgage where a family member (usually a parent) offers their property as security for part of the loan, allowing the borrower to buy a house with little or no deposit. This additional security reduces the lender’s risk and can make it easier for the borrower to obtain approval for the loan. The guarantor provides a guarantee for a portion of the loan, which is often enough to meet the lender’s deposit requirements. This can help borrowers enter the housing market sooner, particularly when property prices are high.

In this arrangement, the guarantor doesn’t typically provide any money directly to the borrower. Instead, they use the equity in their own property as security. If the borrower defaults on the loan, the lender can claim the guaranteed portion from the guarantor’s property. While this can be a great opportunity for first-home buyers, it’s essential that both parties fully understand the financial and legal implications of this arrangement before proceeding.

Who Can Be a Guarantor?

In Australia, a guarantor is usually a close family member, most commonly a parent or grandparent, but some lenders may allow siblings or other relatives to act as guarantors. The guarantor needs to have significant equity in their own property to provide the necessary security. In most cases, lenders will only accept guarantors who own their property outright or have substantial equity, and who have a strong financial position. The guarantor’s credit history will also be reviewed to ensure they can meet the requirements.

Being a guarantor is not a decision to be taken lightly. The guarantor must understand that they are putting their own assets at risk should the borrower fail to meet their repayment obligations. Lenders will typically limit the guarantee to a certain portion of the loan (such as 20% of the property value) to protect the guarantor. It’s important that guarantors seek independent financial and legal advice before agreeing to this role to ensure they are fully aware of the risks.

Benefits of a Guarantor Home Loan

One of the key benefits of a guarantor home loan is the ability to avoid paying Lender’s Mortgage Insurance (LMI). LMI is usually required when a borrower has less than a 20% deposit, and it can add significant costs to the loan. With a guarantor providing security for part of the loan, borrowers can bypass this requirement, which saves them money and reduces the overall cost of the mortgage. Additionally, this arrangement allows borrowers to secure a loan with little or no deposit, making it easier for first-home buyers to enter the market.

Another advantage is that a guarantor home loan can speed up the home-buying process. Instead of waiting years to save for a deposit, borrowers can purchase a property sooner with the support of a guarantor. This can be particularly valuable in a rising property market, where waiting to save a deposit might mean being priced out of desirable areas. For young Australians looking to secure their first home, a guarantor loan can make the difference between buying now or waiting several more years.

Risks and Considerations for Guarantors

While the benefits for borrowers are clear, guarantors must carefully consider the financial risks they are taking on. If the borrower is unable to make their mortgage repayments, the guarantor is legally responsible for covering the guaranteed portion of the loan. This could mean the guarantor’s own property is at risk, particularly if the borrower defaults on the loan and the property is sold at a loss. The guarantor’s liability extends until the borrower has repaid the guaranteed portion of the loan or until the loan is refinanced to remove the guarantor.

Apart from financial risks, there are potential emotional and relational challenges involved in being a guarantor. The pressure of knowing they are responsible for the borrower’s loan can strain family relationships, especially if financial difficulties arise. It's also important for both the guarantor and the borrower to understand that this commitment may affect the guarantor’s ability to borrow for their own purposes in the future. For these reasons, it's crucial that the guarantor fully understands the obligations and seeks professional advice before committing to the arrangement.

How to Remove a Guarantor

Once the borrower has paid off a portion of the loan or built up enough equity, it may be possible to release the guarantor from their obligations. Lenders usually allow the guarantor to be removed when the borrower’s loan-to-value ratio (LVR) reaches 80% or lower, meaning the borrower now has sufficient equity to cover the deposit themselves. At this point, the lender no longer requires the guarantor’s security, and they can be released from the loan without any further liability.

Another way to remove a guarantor is through refinancing. Once the borrower’s financial situation improves, they can refinance their home loan to remove the guarantor from the mortgage. This is a common option, especially if the borrower has been able to make regular repayments and has built up equity in their property. Borrowers should discuss the process of releasing a guarantor with their lender and ensure they meet all the requirements before proceeding.

Conclusion

Guarantor home loans can provide significant advantages for first-home buyers, allowing them to avoid LMI and secure a property with little or no deposit. However, the arrangement comes with financial risks for the guarantor, who must be prepared to cover part of the loan if the borrower defaults. It’s important for both the borrower and the guarantor to fully understand the responsibilities and potential consequences of this arrangement before entering into it.

If you need help with securing a guarantor home loan, speak to the expert mortgage brokers at Eden Emerald Mortgages. They can explain the entire process to you, find you the right lender for your needs, and negotiate the lowest interest rates, completely free of charge! Fill out the form below to get in touch and book a call or appointment.