What is a guarantor home loan?
A guarantor home loan is one that’s partially secured by a parent or other family member who offers up their own home equity in addition to your cash deposit.
Some lenders call it a family security guarantee or a family pledge home loan. For the guarantor, their equity is the difference between their property’s value and how much they owe on it.
Using a guarantor can help you buy a home sooner without saving the full 20% deposit needed to avoid lender’s mortgage insurance (LMI). In some cases, a guarantor can mean being able to secure a home loan with no deposit at all.
Without a guarantor, most lenders require at least a 5% deposit, which is a loan-to-value ratio (LVR) of at least 95%. In that case, you’d have to pay LMI unless you apply via the government’s Home Guarantee Scheme for low-deposit borrowers, which has limited availability.
According to major bank ANZ, lenders tend to prefer guarantors who can use equity in a property they own as the guarantee. The other option is a serviceability guarantor who pledges some of their income. This is considered riskier from a lender’s perspective and is rarely accepted.
How does a guarantor home loan work?
Your guarantor must be a homeowner and have enough equity to secure your home loan. A guarantor may secure a portion of your loan — e.g. 20% to reduce your LVR to 80% (and avoid LMI) or the full loan amount. You’ll still need to borrow money from a lender and the loan itself will be the same as a standard home loan. The key difference is it will be secured by two properties (yours and the guarantor’s) instead of one.
Depending on the lender, there are two ways a guarantor home loan can be structured:
Depending on the lender, there are two ways a guarantor home loan can be structured:
- One home loan with your guarantor providing security.
- Two separate home loans: one for the majority of the property value secured solely by the home you buy a second mortgage covering the remainder of the property’s value (the portion secured by your guarantor). Once you’ve paid off the second smaller loan, you can apply to remove the guarantee. This option seems to be more common with Commonwealth Bank subsidiaries including Bankwest. Keep in mind the guarantor doesn’t need to contribute to the mortgage repayments (that’s solely the borrower’s responsibility), but they will be partially responsible for the debt.
In the event of a default, your property could be sold to recoup the lender’s costs as a first resort. If the property sale doesn’t cover the outstanding mortgage balance, the lender may seek the guarantee amount from the guarantor, according to ANZ.
Your guarantor can be released from their obligations once you’ve made enough repayments or accumulated enough equity in your property to cover the guaranteed portion of your home loan.
It’s important that both the borrower and guarantor understand the responsibilities and conditions of a guarantee agreement. Lenders usually require both parties to sign a declaration confirming they have obtained independent legal advice before finalising the home loan agreement.
How much can you borrow with a guarantor?
If you have a guarantor, you may be able to borrow the full loan amount (100% of the purchase price) without having to pay LMI. You can also cover stamp duty costs and other costs through the home loan.
However, some lenders (e.g. ANZ) will limit the guarantee to 20% of the property’s value to reduce the LVR to 80%.
How much you can borrow in dollar terms with a guarantor will depend on your income, expenses, liabilities, and your lender’s guarantor policy. Your savings history will also be taken into account. Most lenders will require you to demonstrate a certain amount of genuine savings, like a 5% deposit, even if you have a guarantor supporting your loan.
The lender will usually check that you can service the full amount no matter how much assistance your guarantor provides.
Guarantor home loan example
Here’s a simple scenario illustrating how a guarantor home loan works:
- Let’s say you want to buy a property worth $600,000
- You’ve saved $30,000, which is 5% of the purchase price, but you need another 15% ($90,000) to avoid LMI
- Your parents own a home valued at $800,000 and have enough equity to guarantee the remaining $90,000
- You can now borrow the money you need without putting any more money down or paying LMI
- Over the next few years, you repay $90,000 of your loan principal and release your parents from the guarantorship
Lenders still scrutinise guarantor home loans
Mansour Soltani , Home Loans Expert
“Lenders will conduct a thorough financial assessment of both the guarantor and borrower. You both will need to show three months of clean bank statements with no late fees and no overdrawn accounts. I’ve seen cases where guarantor home loan applications have been denied for something as little as a $10 late fee.”
Mansour Soltani , Home Loans Expert
Guarantor home loan savings analysis
Here’s an example showing how much a home buyer with a 5% deposit could save over a 30-year loan term by avoiding LMI with the help of a guarantor.
| Home buyer with a guarantor | Home buyer without a guarantor | |
|---|---|---|
Property price | $600,000 | $600,000 |
Interest rate | 6.00% | 6.00% |
Deposit | 5% ($30,000) | 5% ($30,000) |
Loan amount | $570,000 | $570,000 |
Guarantor equity contribution | 15% ($90,000) | No guarantee |
LMI cost* | $0 | $26,305 (added to loan) |
Monthly repayments | $3,417.44 (save $158) | $3,575.15 |
Total interest payable | $660,278 (save $30,471) | $690,749 |
Total to repay | $1,230,278 (save $56,776) | $1,287,054 |
Pros & cons of guarantor home loans
Pros
- You can buy a home sooner with a smaller deposit or no deposit if you have a guarantor
- Avoid paying LMI if the guarantor guarantees up to 20% of your loan amount
- Having a guarantor may increase your chances of approval
Cons
- The guarantor is financially liable if you’re unable to make repayments
- Some of the guarantor’s equity is tied up in your property, limiting their options to sell or refinance
- Mixing family and finances could strain relationships
