Guarantor Home Loans in Australia

How does a guarantor home loan work?

If you have a close family member with equity in their property (that means, they own all or most of the property), they can guarantee your deposit. You still need to borrow money from a lender and repay it, but the guarantor provides security.

And that's the catch: if you are unable to repay the mortgage, your guarantor may have to.

To minimise risks, a guarantor can guarantee only a portion of a loan, say 20%. Once the borrower has repaid 20% of the loan (or the property has increased in value and the borrower now has 20% equity), the guarantor's property is safe even if the borrower fails to repay the remaining 80%.

Guarantor mortgage scenario

Let's look at the process with an example guarantor scenario:

• Jai and Rahda purchase a $600,000 apartment with a 5% deposit ($30,000).
• They estimate their lenders mortgage insurance (LMI) premium using Finder's LMI calculator and are shocked to learn they'll need to pay $22,789.
• Rahda's parents own their home outright. They agree to guarantee a further 15% ($90,000) of the property cost. This eliminates the LMI cost completely.
• Jai and Rahda repay $100,000 of their loan principal over the next 5 years. Rahda's parents are no longer liable because the $90,000 they guaranteed has been repaid.

Finder survey: How do people typically secure a low-deposit home loan?

How much can I borrow with a guarantor?

With a guarantor, many lenders will let you borrow up to 100% of the value of a property. They may even allow up to 110%, which is enough to cover other costs like stamp duty and moving costs.

If you have a 5% deposit saved, having your parents guarantee a further 15% of the deposit means you can avoid paying LMI.

To find out if you're eligible for a guarantor home loan, first speak to your parents or whoever you're asking to guarantor your loan to confirm they're willing to be involved. You need to find out how much their property is worth and how much their loan is. This allows you to work out how much equity they have available.

For instance:

• If their home is worth $700,000 and their loan is $450,000, they have $250,000 equity. This should be enough to guarantee part of your deposit.
• If their home is worth $700,000 and their loan is $600,000, then they only have $100,000 equity – which may not be enough to assist.
• The more equity they have, the greater the chance that the bank will accept them as a guarantor on your loan.

Once you've worked out that your guarantor has enough equity to help you, approach your bank or lender and see what their specific loan criteria is. Some lenders may require borrowers to have at least 5% of a deposit in genuine savings, even with a guarantor.

Who can act as a guarantor?

Some lenders only accept parents as guarantors while others accept close relatives. Every lender has different requirements, but the following criteria usually apply:

• Finances and credit. A guarantor needs equity in their property, a stable income and a good credit rating.
• Residency. Lenders generally want a guarantor to be an Australian citizen or permanent resident.
• Age guidelines. A guarantor must be over 18 and typically under 65.

Risks and benefits of a guarantor mortgage

Thankfully, a guarantor is only liable to repay the amount they guarantee. Once that amount is repaid, the guarantor is released from further liability (the borrower, obviously, is not).

Planning to act as guarantor for your child? Ask these questions first

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• • Can I afford to go guarantor? Assess your financial situation realistically. While you shouldn't have to spend a cent, you do need to plan for a scenario where you suddenly become liable for the full amount you've guaranteed.
  • Can the borrower afford this loan? Try to assess the borrower's financial situation as clearly as possible. Don't make this judgement on instinct either: ask for hard evidence.
  • How is your relationship with the borrower? Just because you're close family doesn't mean you get along at the best of times. And with large sums of money involved even good relationships can become strained.
  • Have I sought professional advice? Get independent legal advice to make sure you fully understand the guarantor process.

How is a guarantor 'released' from a home loan?

Usually, you can apply to release the guarantor from the loan once the borrower has at least 20% equity in the property.

With 20% equity, you won't have to pay any LMI and your chances of getting the loan approved are strong. If your equity is less and your loan to value ratio is higher, say 85-90%, you're less likely to get your guarantor released until you have at least 20% equity.

To remove the guarantor, your lender will conduct a valuation on the property. Depending on the results of that valuation, you next step will either be to wait (if there's not enough equity yet), or apply with the lender to have the guarantor released.

Your bank may charge some administrative, government or settlement fees, which are usually around $300-500. If you are required to pay LMI (if your loan is above 80%), you'll need to fund this too.

What are my options if I can't get a guarantor for my home loan?

Having a parent who is able to guarantee your deposit is a privilege that many borrowers don't have. If you can't access a guarantor loan, here are some other options that might work:

• A low deposit home loan. Low deposit home loans let you borrow up to 95%, but LMI can be very expensive. You can capitalise LMI costs, meaning you add the premiums into your mortgage and repay the premium as part of your monthly mortgage payment.
• First Home Loan Deposit Scheme (FHLDS). Are you a first home buyer? If so, you can access the low deposit loan we mentioned, without having to pay a cent of LMI. Here's how the FHLDS works.
• Co-buying. A co-borrowing arrangement means getting a loan with your parents and buying a property together. You and your parents will both be liable to repay the entire loan. Ownership arrangements can also be complicated.
• Rentvest. If you can't afford a home where you want to live, you could buy a cheaper property somewhere else and rent it out. You're building wealth through an affordable investment while living somewhere else.
• Family Home Guarantee. If you're a single parent, you may qualify for the Family Home Guarantee, which allows you to borrow with just a 2% deposit. There are strict eligibility criteria, though.
• Keep on saving. You can also just keep scraping a bigger deposit together. Here are some strategies to help you build your deposit.

A mortgage broker may be able to help you navigate your options as a borrower, whether you need a guarantor or not.

Find a mortgage broker

Frequently Asked Questions

• What is a Family pledge home loan?

  A family pledge or family guarantee home loan is a way of getting a mortgage with support from a guarantor. This is usually a family member who owns a property and is willing to help you out.

  Many lenders refer to these loans as family pledge loans. But in many cases you simply apply for an existing home loan and attach a guarantor to it. Family pledges or guarantee home loans aren't specific products themselves.

  Buying a house with a family pledge makes it easier to get your loan approved because the guarantor offers your lender more security. But this is where it gets riskier too. Family and finance don't always mix. If you can't repay the loan, your family member might have to.

• How does a family guarantee work?

  A family pledge allows you to use the equity in your parents' property or another family member's property as security on a home loan. Guarantors are limited to immediate family members, including parents, grandparents and siblings.

  The guarantor pledges to use their property to back your loan. If for whatever reason you can't repay the loan later, your lender may force your guarantor to pay all or part of your debt. This is what makes pledges risky.

  While it was once standard practice to guarantee the entire loan and put your home on the line, today the security on the new home loan can be split and you can limit your guarantee. For example, the equity in your parents' property may be used as security for 20% of the loan, while the property you are purchasing will be used as security for the other 80% of the loan. So if you're helping your kids purchase a property for $500,000, your 20% guarantee is only $100,000.

• What are the benefits of family pledges?

  Access finance. Most loans will have a minimum deposit that will have to be paid upfront in order to be accepted. This will usually be around 20% or as low as 5%. With a family guarantee you may be able to borrow more money and provide less of a deposit, which will allow you to buy a home sooner.
  Avoid LMI. Borrowing more than 80% LVR usually requires you to take out lender's mortgage insurance (LMI), but a family guarantee means this extra expense can be avoided.
  Increase borrowing power. A family guarantee can boost your borrowing power. The family guarantee will often be used to cover a deposit that can't be paid so you will be able to borrow close to 100% of the loan in some cases if properly secured. Often, guarantor borrowers can borrow 100% of a property value plus costs.
  Eligible for FHOG. Taking out a family pledge home loan means you are still eligible for financial assistance through the First Home Owners Grant. In addition, it also means you will be eligible to access most mortgage products from a lender.

• What are the drawbacks?

  Putting the family home at risk. If you're the guarantor you could be putting your family home at risk, so consider all your options before choosing this approach.
  Not receiving expert advice. If you're considering applying for a family guarantee home loan, it's important that you seek out independent financial and legal advice first. You need to understand exactly what the guarantor will be liable for in the event that you default on the loan.
  Not all banks offer family guarantees. Family pledge home loans aren't offered by all lenders, so the best thing to do is approach a mortgage broker for advice tailored to your needs.

  A family guarantee is a type of guarantee that can be made to secure a property. This is done by securing the deposit shortfall to a property owned by the guarantor, such as your parents or a close family member. It is also known as a guarantor home loan.

• How does a family guarantee work?

  A family pledge allows you to use the equity in your parents' property or another family member's property as security on a home loan. Guarantors are limited to immediate family members, including parents, grandparents and siblings.

  While it was once standard practice to guarantee the entire loan and put your home on the line, today the security on the new home loan can be split and you can limit your guarantee. For example, the equity in your parents' property may be used as security for 20% of the loan, while the property you are purchasing will be used as security for the other 80% of the loan. So if you're helping your kids purchase a property for $500,000, your 20% guarantee is only $100,000.

  How much do they have to guarantee? A common strategy is to guarantee enough equity so that the borrower avoids paying Lenders Mortgage Insurance (LMI). A parent will need to guarantee 20% of the purchase price of the new property if the borrower has no deposit.
  What can be bought with a family guarantee? The family guarantee can be used to buy a home or invest in residential property so buyers will be able to use normal home loans and investment home loans.