A guarantor home loan is a loan secured, in part, by the borrower’s friend or family member instead of a more traditional deposit. By taking into account your guarantor’s finances, a guarantor mortgage may allow you to borrow more than if you were taking out a mortgage alone. However, the guarantor won’t own any of the property itself.
A guarantor home loan differs slightly from a traditional home loan, where a lender determines what they are willing to lend you based on your finances. This standard approach to getting a home loan can be quite limiting for people trying to buy a property alone, earn less, or have an imperfect credit history.
How does a guarantor home loan work for borrowers?
A guarantor home loan helps many first homebuyers borrow a larger amount than if they borrowed alone. That’s because the lender includes both the borrower’s finances and the guarantor’s when calculating how much the applicant can afford to borrow.
That added layer is beneficial as saving for a deposit may seem like an insurmountable challenge for would-be first homebuyers because property prices keep going through the roof along with everything else, such as rent, groceries and petrol.
So, while you could purchase a property with less than a 20% deposit if your lender permits it, you’d be saddled with lenders mortgage insurance (LMI), which is effectively money down the drain and could cost many thousands on a $500k property.
Or, instead of saving up $100,000 for a 20% deposit, a guarantor could offer the equity in their own property to top up your savings. For example, you and the guarantor could both deliver a 10% deposit of $50,000, bringing the combined total offered to the lender up to the required $100,000.
Alternatively, a guarantor could fully guarantee the loan by offering the entire 20% deposit required to avoid LMI.
How much can you borrow with a guarantor?
Each lender has different terms and conditions. In some instances, your lender may loan you 100% of the cost of the property — these loans requiring no deposit are at all known as 100% mortgages.
As the mortgagee, your lender will still require evidence that you can manage the loan-repayment process, regardless of whether you have a guarantor. This proof will usually involve providing at least some documentation of savings or a track record of regularly paying rent for a specific time.
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How does going guarantor on a home loan work?
Guarantor loans may also be known as ‘family pledge loans’ and usually involve parents or siblings who have sufficient equity in their own property to qualify.
As a guarantor, you’re giving the lender permission to use your property as additional security for the loan. While the principal security for the property is the property itself, the lender will also take a mortgage over your own property as an added guarantee.
The guarantor can choose how much of the loan they wish to guarantee, depending on their financial situation and how much of your loan they are comfortable vouching for. The safest and most common option is simply guaranteeing a portion of the house deposit.
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Who can go guarantor on a home loan in Australia?
A guarantor can be anyone who makes sense to the bank and has built up sufficient equity in a property to cover their share of the mortgage in a worst-case scenario.
However, since the guarantor provides the additional security for your home loan, most lenders prefer the guarantor to be a close relative such as a parent or sibling. Yet, depending on the lender, a guarantor could be an uncle or aunt, a grandparent, an ex-spouse, or even a close friend.
Guarantors are not required to make any payments towards the property, which is the sole responsibility of the mortgagee.
However, if the mortgagee cannot make their repayments, the lender may request that the guarantor make the repayments to at least cover whatever percentage of the mortgage they went guarantor on.
How long does the guarantor remain the guarantor?
The guarantor can typically nominate how long they want to remain on the loan, and their commitment usually ends after a few years when the property can be revalued. However, the time before the guarantor is released usually depends on the percentage of the mortgage guaranteed in the first place.
A lender generally will release the guarantor once the homeowner has built sufficient equity in the property, usually 20% but in some cases less. That process usually involves refinancing, which should be straightforward and painless as long as your lender doesn’t impose unnecessary fees on the process.
It’s also worth noting that it may take years longer for the guarantor to be released from their commitment if the borrower’s property’s value falls and their financial or employment situation worsens.
Pros of a guarantor mortgage
The main feature of a guarantor home loan is that it allows you to borrow more than you could if you were borrowing on your own. This type of home loan can help borrowers get their foot in the door, avoid the dreaded mortgage insurance black hole and quite possibly get a competitive interest rate, given the added loan guarantee in place.
First homebuyers who are nowhere near getting the minimum required deposit together — despite having good, steady employment and a history of paying rent regularly over several years — may be able to get on the property ladder with a guarantor home loan.
Additionally, guarantor home loans can also make a big difference to those with black marks on their credit report. These issues can make it challenging to obtain a mortgage on your own, but as the lender has the peace of mind that a guarantor can cover repayments if you can’t, it may be more likely to approve your application.
Cons of a guarantor home loan
To get a guarantor home loan, you’ll need to find someone in a strong financial position who is willing to act as a guarantor, which may not be an option for most.
Finding a lender willing to offer a guarantor home loan can also be challenging. So you may not be able to get a guarantor home loan, even if you have someone willing to act as a guarantor.
Historically, interest rates on guarantor mortgages have also been higher than those offered on regular mortgages. It’s all about risk — a guarantor mortgage is a more risky prospect for a mortgage lender, so lenders want to levy a higher interest rate to account for that risk. That means that your monthly repayments will be higher.
Pitfalls to consider
As a guarantor:
- You are responsible if the homeowner can’t make repayments, so you should always want the loan to be over and done with as soon as possible to mitigate the risk associated with your guarantee.
- If the house sells and there is a shortfall, you become liable, so you need to be wary of your debt and how your financial situation could change over the loan’s term.
- If you can’t meet your debt or get a second mortgage on the property you’ve used for your guarantee, the lender may sell it. That potential for loss is a considerable risk, especially if you are getting close to retirement age.
As the mortgagee:
- You need to be aware of the responsibility you’re asking your guarantor to take on. Make sure you can meet your end of the deal.
- You should always go over the contract’s fine print to ensure your lender is guaranteeing the exact amount agreed on and the process of releasing from the guarantee is as straightforward as possible. That way the guarantor faces as little exposure to disaster as possible and you get your dream home sooner.
- Finally, remember that having your finances linked to a loved one in this way can also cause tension, especially if there is any concern about your ability to keep up with repayments. Consider whether this would strain your relationship.
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