Guarantor Home Loans – How to Get One
What is a guarantor home loan and how does it work?
Quite simply, a guarantor home loan is one that has a portion of the loan backed up by a guarantor.
If you’re asking yourself “What is a guarantor?”, well, it’s a friend or family member who has enough equity in their own property to secure the amount they’re pledging. A guarantor guarantees your loan repayments to the lender.
Most often, as you can imagine, it’s family members who do this huge favour. Also known as the Bank of Mum and Dad, this financial guarantee can help first–time buyers to get on the property ladder.
The house buyers still have to borrow money from a lender, but some of the amount is secured by a guarantor. Guarantor home loans can work really well, especially if the secured portion is small compared to the entire loan.
While these arrangements usually work well, there’s always the chance that the guarantor will have to fulfil their promise to the lender and make repayments on the mortgage if you’re unable to.
Can a guarantor lose their own home?
It’s possible. The guarantor can minimise their risk by only guaranteeing a small proportion of the loan so that, if the worst happens, they have more than enough equity to “absorb” the extra amount.
A typical example of a guarantor home loan
Simon and Andrea have their sights set on a $600,000 house, but they only have a 10 per cent deposit ($60,000) to put down on it.
After looking at a lenders mortgage insurance calculator, they’re dismayed to see that they’ll have to pay just over $13,000 in LMI. Thankfully, Simon’s parents own their house outright and so they agree to guarantee a further $60,000 of the total loan, which brings the deposit up to 20 per cent. This means that Simon and Andrea don’t have the additional expense of the LMI, which would have bumped their monthly repayments up by $67.
Over the next three years, the couple pays off more than $70,000 of their home loan and so Simon’s parents are no longer liable for the amount they guaranteed.
Who can act as a guarantor? What is a family guarantee?
In the main, guarantors are parents, although some lenders accept other close relatives like uncles, aunts, siblings and grandparents. Each lender will have its own criteria, but generally guarantors need to:
- Have good finances and credit, including a minimum amount of equity in their property and a stable income
- Have Australian residency or citizenship, although there may be exceptions
- Be aged between 18 and 65, although older guarantors may be considered in some situations.
How much can you borrow with a guarantor mortgage?
Some lenders will let you borrow up to 100 per cent of the value of the property, but most arrangements are for smaller amounts, usually enough to bring the deposit up to or just over 20 per cent.
Some lenders will want to see that potential borrowers have at least five per cent of the value in savings, even if they’re using a guarantor as well, as this shows good financial sense and planning.
The benefits of guarantor mortgages
You can get onto the property ladder sooner, which means you hit the ground running and start paying off the loan, which means you’re building up equity and possibly making capital gains. With house prices rising, you could be stuck saving for a deposit that’s always just out of reach.
You can avoid LMI, which can add tens of thousands to your total home loan.
Having a guarantor can increase your chances of getting your mortgage application approved.
The risks of guarantor mortgages
In the right circumstances, a guarantor mortgage is a brilliant solution, but if the pledged amount is uncomfortably high and you’re unable to meet your monthly repayments, your guarantor could lose their property.
Finances and family don’t always mix well, so you need to be sure that you’ll be able to cope with the situation and work out what to do if things go wrong.
Is the government banning guarantors?
No, but there are some restrictions on who can act as guarantor; the guarantor’s property must be in Australia, too.
If you’re about to become a guarantor, here’s what you need to consider
Can you afford it? If your relative suddenly loses their job, can you release equity from your property, or afford to pay the shortfall out of savings or earnings?
Can your relative afford the mortgage? You need to see evidence, rather than going with your feelings because you want them to own their own home.
Do you have a close enough relationship with the borrower? If you think you might begrudge them going on holiday because you want them to make mortgage overpayments, this could end badly.
Do you understand what you’re doing and what your obligations are? Talk to a solicitor even if you think you do.
What can I do if I don’t have a guarantor?
Not everyone is fortunate enough to have a guarantor, but your parents and other relatives might be able to help you in other ways, maybe by paying your removals costs or by helping you to decorate your new place.
If you do have to do things alone, then there are still ways to get on the ladder.
You could apply for a low–deposit home loan
Some lenders will let you borrow up to 95 per cent of the property value, but your LMI premium could be huge. You can, however, capitalise your LMI by bundling it into your mortgage so you pay it off monthly.
You could co-buy with your parents or another relative
You get the home loan with your relative and buy the property together. While you’ll be making the repayments yourself, you and your relative will be equally liable for the repayment of the entire loan. This sort of arrangement can make ownership a bit complicated, so do involve a solicitor.
You can increase your savings efforts
Just keep saving and then save some more. It’ll be painful and you may have to look at smaller properties or places a little further out if you find price rises outstripping your efforts, but it’ll be worth it in the end.
The information contained on this web site is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. If you or someone you know is in financial stress, contact the National Debt Helpline on 1800 007 007.