Guarantor Loan Solutions

A guarantor home loan allows a family member—typically parents—to use their property as additional security for your loan.

This arrangement helps first home buyers enter the property market sooner by potentially eliminating the need for a deposit.

You’ll also benefit from avoiding costly Lenders Mortgage Insurance (LMI), while simultaneously increasing your borrowing capacity and improving your chances of loan approval. Many Australians have used this pathway to achieve homeownership years earlier than otherwise possible.

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Here are the key points you need to know about a Guarantor Home Loan:

Your guarantor generally needs to be your parents or a close relative
Your guarantor needs to own a property that has sufficient equity in it to support your application
Your guarantors property doesn’t necessarily have to have no debt against it. There can be an existing mortgage in place
You won’t have to pay mortgage insurance potentially saving you thousands of dollars
No savings history is required but lenders will generally require an explanation on where your money has been spent. For example, rent payments or accelerated repayments on other lending
You may be able to borrow up to 110% of the purchase price of a property
The interest rates available are very competitive
Should be easier to qualify for than a 90-95% loan
Some lenders may allow you to consolidate your existing debt into the home loan if you wish to do that

Guarantor considerations

Most lenders will allow your guarantor to limit the amount of their guarantee. For example, assuming you borrowed a total of $500,000 your guarantor wouldn’t be guaranteeing the entire loan amount amount. The guarantee amount would generally be around 20-30% of the loan amount. So in this example it would be $100,000 to $150,000
The lender you choose will take a mortgage over your guarantors property. So if their property is unencumbered (i.e. there is no debt against it) the lender you use will require their original certificate of title. If they have a mortgage against their property then your lender will take a 2nd registered mortgage over their property. Your lender will need to seek consent from your guarantors lender to take the 2nd mortgage and there will be a fee of about $150 to $500 attached to this.
Lenders generally require your guarantors to seek independent legal advice before signing the guarantee documents they will send after approval. So the guarantor may need the assistance of a solicitor.
Once you have built up sufficient equity in your property you can apply to the lender to have your guarantors removed from the loan. If, for example, in 3 years time you think that your property has increased in value and/or you have paid a significant amount of the loan you could then apply for this. At the time in the future your loan balance must be 90% or less of the value of the property. The lender will organise a valuation of the property to determine this. If the loan balance is 80%-90% of the property value you can have your guarantors removed but you will have to pay a mortgage insurance premium. If the loan is 80% or less of the value then no mortgage insurance would be payable.
If a borrower defaults on this type of loan the bank will generally repossess and sell the borrowers property first in a mortgagee sale. If there were a loss from the sale they could then make demand on the guarantor to the extent of the guarantee amount. If the guarantor cannot pay the shortfall the lender could then take possession of their property to cover the loss. This is obviously the worst case scenario and would only occur if you defaulted on the loan. This is why it is a good idea to insure yourselves with income protection insurance etc to minimise this risk. Please seek the advice of a licensed insurance specialist.