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Guarantor home loans

  • A guarantor home loan can help you buy a home with little to zero deposit
  • A guarantor is usually a parent or family member who helps secure your loan
  • Our analysis shows the potential savings with a guarantor vs no guarantor
guarantor home loan
guarantor home loan

In our guarantor home loans guide:

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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.

Guarantor home loan graphic

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:

  1. One home loan with your guarantor providing security.

  2. 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.

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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.

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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

“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, Money.com.au's home loan 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.

Property price

Home buyer with a guarantor

$600,000

Home buyer without a guarantor

$600,000

Interest rate

Home buyer with a guarantor

6.00%

Home buyer without a guarantor

6.00%

Deposit

Home buyer with a guarantor

5% ($30,000)

Home buyer without a guarantor

5% ($30,000)

Loan amount

Home buyer with a guarantor

$570,000

Home buyer without a guarantor

$570,000

Guarantor equity contribution

Home buyer with a guarantor

15% ($90,000)

Home buyer without a guarantor

No guarantee

LMI cost*

Home buyer with a guarantor

$0

Home buyer without a guarantor

$26,305 (added to loan)

Monthly repayments

Home buyer with a guarantor

$3,417.44 (save $158)

Home buyer without a guarantor

$3,575.15

Total interest payable

Home buyer with a guarantor

$660,278 (save $30,471)

Home buyer without a guarantor

$690,749

Total to repay

Home buyer with a guarantor

$1,230,278 (save $56,776)

Home buyer without a guarantor

$1,287,054

Home buyer with a guarantorHome 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

*Note: LMI estimations based on Westpac’s calculator for a property in Queensland. Each lender may calculate LMI differently.

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

Cons

The guarantor is financially liable if you’re unable to make repayments

Pros

Avoid paying LMI if the guarantor guarantees up to 20% of your loan amount

Cons

Some of the guarantor’s equity is tied up in your property, limiting their options to sell or refinance

Pros

Having a guarantor may increase your chances of approval

Cons

Mixing family and finances could strain relationships

ProsCons

You can buy a home sooner with a smaller deposit or no deposit if you have a guarantor

The guarantor is financially liable if you’re unable to make repayments

Avoid paying LMI if the guarantor guarantees up to 20% of your loan amount

Some of the guarantor’s equity is tied up in your property, limiting their options to sell or refinance

Having a guarantor may increase your chances of approval

Mixing family and finances could strain relationships

FAQs about guarantor home loans

Most lenders accept parents or immediate family as guarantors, including partners, siblings, some grandparents and children (aged over 18). Lenders have different eligibility criteria, but the following generally apply:

  • A guarantor must be over 18 and typically under 65
  • They must be Australian citizen or permanent resident
  • They must own a home with sufficient equity to provide as guarantee
  • They must have a good credit score and supply supporting financial documents
  • They must meet the lender’s minimum income requirements

You can usually apply to release the guarantor from your home loan once you have enough equity in your property to cover their guaranteed portion. This typically means waiting until your loan balance is less than 80% of your property’s value (less than 80% LVR).

The other common requirement is that you have always made your loan repayments in full and one time.

The lender will generally need to conduct a property valuation to see if there’s enough equity to release the guarantorship. If not, the guarantor may have to pay out their guaranteed portion of the loan if they want to withdraw from the agreement. You may have to pay additional fees to release your guarantor, depending on your lender.

Lenders usually charge additional fees if your guarantor home loan is structured as two separate loans. If you have a standard mortgage with a guarantor as a third party to the loan, some lenders charge fees to process the extra paperwork.

Home equity is usually calculated by subtracting your home loan balance from the current market value or the bank's valuation of your property.

For example, if your balance is $600,000 and your property is worth $800,000, you have up to $200,000 of equity. This is also known as usable equity, as it’s the amount you can actually access to guarantee a home loan or refinance.

Not every borrower has the option of applying for a home loan with the help of a guarantor. If that’s the case, there are some other options worth considering, such as:

  • Low deposit home loan: A low deposit home loan allows you to buy a home with a 5-10% deposit instead of the standard 20% of the property’s value most lenders require. You may need to pay for LMI in this scenario.

  • No deposit home loan: Some high-income earners or professionals in secure or high-paying industries may qualify for a no deposit home loan without a guarantor.

  • Home Guarantee Scheme (HGS): This Australian government scheme helps eligible home buyers to buy a home with a deposit of as little as 5% (or 2% for single parents) without paying LMI. It’s available through participating banks.

  • Deposit bond: A deposit bond is an alternative to a cash deposit. It’s an insurance policy that guarantees the borrower will pay a deposit at settlement or by the agreed period stated in the policy document.

  • Co-buying: You could buy a property with family or friends and share ownership. All parties will be liable to repay the loan. A ‘tenancy in common’ agreement is where each party owns an individual share in the property. A ‘joint tenancy’ agreement is when both tenants own the property together, but no one owns an individual share.

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AS FEATURED IN

Written by

Megan Birot Money.com.au writer

Senior Finance Writer

Megan Birot

Reviewed by

Mansour Soltani home loan expert

Home Loans Expert

Mansour Soltani

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