Did you know that 60% of Australians borrow from the Bank of Mum and Dad when purchasing their first home? In most cases, this comes in the form of a guarantor home loan.
Securing a home loan with guarantor allows first home buyers to access the property market faster, and with little to no deposit.
With access to over 50 lenders and a depth of experience working with guarantor loans and home equity loans, Freedom Finance Group is uniquely qualified to help you get the best home loan possible.
If you’re looking for a mortgage broker, get in touch with me today for a free consultation. We can get you the best rate available, as well as helping you access first home owner schemes and advising you on how to avoid stamp duty in NSW.
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A guarantor is a property-owning third party (usually an older relative or parent) who uses their own equity to guarantee a new home loan. This method opens the property market to first home buyers, allowing them to get a home loan with no deposit because the bank has the assurance of the guarantor’s equity. If, for whatever reason, the purchaser cannot make the minimum repayments required by the loan, that responsibility would fall to the guarantor.
In future, once a portion of the mortgage has been paid down or the property has increased in value it is possible to release the guarantor from the loan through refinancing. While it’s a significant responsibility, in the increasingly competitive property market, a guarantor home loan can be a great way to get a much-needed leg-up.
A third party, usually a family member, is willing to use their own home equity as security. The bank uses this equity to safeguard the loan, removing the need for Lenders Mortgage Insurance, and some or all of the deposit. In some cases you can not only borrow the full cost of the property, but even closing costs.
Security against this second property is accepted in lieu of a deposit, so the equity in the guarantor’s home must cover at least 20% of the new home’s value. Even with a guarantor loan, you will still need to provide the bank with evidence that you have a stable job, solid credit history, and the ability to pay back the loan on your own.
The biggest risk for guarantor loans is if the property has to be sold and the full amount of the loan can’t be recovered from the sale. In this case, the guarantor’s home may be at risk.
However, assuming you can afford the repayments, and everyone understands the risks involved, this can be a good option to consider.
On the plus side, you can purchase a home with little to no deposit. This means you don’t have to save as much money, or invest as much of your own capital. It also means you can get into the market sooner, before property prices rise out of reach in the years that it might take you to save a 20% deposit. You may save on Lenders Mortgage Insurance, which can cost thousands of dollars.
On the downside, your loan amount will be higher. This means you could owe almost as much as the property is worth. Should you decide to sell in the short term, you may find you won’t be able to pay off the total balance from the proceeds.
You’re also implicating someone else’s home, which requires significant trust from both parties. Defaulting on the home loan could result in jeopardising the guarantor’s financial security, which is not a risk to be taken lightly.
There are a variety of ways you can purchase a home without a deposit:
The guarantor provides a guarantee to cover the loan if the borrower defaults. This loan is often secured against the guarantor’s property or assets, making it a common choice for first-time homebuyers who may have a smaller deposit.
A family member (usually a parent) acts as the guarantor. The family member uses their own property as security to help the borrower secure a larger loan or reduce the loan-to-value ratio (LVR). This is particularly popular for first-time homebuyers who can’t afford a large deposit.
The home loan guarantor offers their property as collateral. The borrower doesn’t need to provide any additional security, but the guarantor’s assets are at risk if the borrower defaults. This type of loan helps borrowers who might not otherwise be able to secure a loan due to limited savings or a poor credit history.
The guarantor covers only a portion of the loan (such as the shortfall in the LVR). This type reduces the risk for the guarantor, as they are not fully responsible for the loan, but it still provides the borrower with the security needed to access a loan.
While a guarantor home loan with no deposit is possible, you still need to be able to repay the loan. Once the papers are signed, you’ll need to financially secure (and responsible) enough to make the minimum repayments.
It’s part and parcel of involving a third party that your guarantor’s financial situation could change. If they need to sell their property or are no longer able to support the loan, you could face difficulties securing the loan on your own, or you might need to find a new guarantor or refinance.
Most borrowers rely of family guarantors for home loan security. You are putting someone else’s property, and financial security on the line, which shouldn’t be taken lightly. Significant trust is required on both sides.
Guarantor home loan requirements in Australia are fairly straightforward. The main difference, when compared to a standard home loan, is that both parties will be subject to financial checks.
The borrower should have proof of income and employment to demonstrate the ability to make repayments, and a good credit history. We also recommend having some deposit saved (say 5-10%), although this isn’t strictly necessary.
Your guarantor for home loan should own property with enough equity to cover the loan’s risk. They must also be financially stable with a good credit history and sufficient income.
Let’s have a look at an example of a home loan guarantor in Australia.
Tom, 28, wants to buy a home priced at $800,000 but he only has a 10% deposit ($80,000). The lender requires a 20% deposit ($160,000) to approve the loan, so Tom asks his mother, Maggie, to be his guarantor. Maggie agrees to use her property, valued at $600,000, as collateral for the additional $80,000.
Tom secures a $720,000 loan from the bank with a 4.5% interest rate, and the repayments are $3,600 per month. Maggie is responsible for the loan if Tom defaults, but after 3 years, Tom’s home has increased in value to $900,000, giving him enough equity to refinance.
Tom refinances with a 15% deposit ($120,000), releasing Maggie from the guarantor role and securing the loan in his name alone. This also reduces his monthly repayments to $3,200.
Most guarantees are removed after 2-5 years, at which point the borrowers secures the loan in their name alone, and frees the guarantor from all associated financial responsibility.
When you remove the guarantee, you are renegotiating the terms of your home loan. You can do this when your loan is less than 90% LVR, or 80% LVR, if you want to avoid paying Lenders Mortgage Insurance. You need to have made your repayments on schedule for at least the previous six months, and have maintained a solid credit history, with evidence of reliable income.
Working closely with your mortgage broker can make this is a smooth transition.
Attaching a guarantor on home loan means that, in many cases, you can borrow without a deposit. This method has its advantages, as it gives you access to the property market sooner, before prices rise out of reach. On the downside, however, you are likely to face a higher rate, with higher repayments. For this reason, we generally recommend saving at least 5-10% deposit, if possible.
If you meet certain criteria, you can borrow 105% of the loan – that means closing costs too. Both guarantors and home buyers must show evidence of stable income, and solid credit history.
Even with the option to borrow 105% of the home loan, it’s still recommended to save a small deposit if you can. This can mean less paperwork, and lower rates.
Almost all major banks offer some sort of guarantor mortgage. These lenders include Commonwealth Bank, Westpac, ANZ, NAB, Macquarie Bank, Bank of Queensland, and Suncorp.
Like any loan application, a guarantor loan can be declined if the criteria are not met. If the borrower doesn’t have a stable income or a good credit score, or if the guarantor doesn’t have enough equity in their property, the loan might not go through. Also, if the guarantor has financial issues, or if the loan amount is too high relative to the property value, that could lead to a refusal.
The relationship between the borrower and the guarantor is important too—lenders often prefer close family members.
Of course, being a guarantor comes with some significant risks. If the borrower fails to make their loan repayments, you, as the guarantor, may be held responsible. You may be required to pay off the loan or risk losing your own property if it has been used as security. Even if the borrower is unable to meet payments temporarily, you may have to step in right away, which can put a strain on your finances, as well as your relationship with the borrower. Additionally, if the borrower defaults, it could negatively impact your credit score.
Most guarantors are removed from the loan after 2-5 years once the borrower has built up equity in the property, either through repayments or because the property has increased in value. However, this isn’t automatic, meaning the borrower will have to apply with the lender to have the guarantor removed. Otherwise, the guarantor remains liable for the full duration of the loan.
If the borrower defaults, meaning they cannot make their minimum repayments, the guarantor becomes responsible for covering the debt. The lender can pursue the guarantor for the full amount owed, including any missed repayments, interest, and fees. If the guarantor used property as collateral, the lender could take legal action to seize and sell the guarantor’s property to recover the outstanding loan balance.
Yes, in some cases. By providing additional security (usually in the form of property), the guarantor lowers the lender’s risk, which can make the loan more favourable for the borrower. This may allow the borrower to secure a loan with a lower deposit, avoid Lenders Mortgage Insurance, and potentially access a better interest rate.
Yes, very few guarantors remain attached to the mortgage for the full life of the loan. Most are removed after a few years. At this point, the borrower will have built up equity in the property (either through repayments or because the property has increased in value) and reached the necessary threshold to borrow on their own terms. In most cases, this is between 80-90% LVR.
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We throughly assess your financial situation, including your income, expenses, credit history, and long-term goals
We compare interest rates, loan terms, fees, and other factors to find a deal that aligns with your needs.
We finalise all the paperwork and coordinate with other parties, such as lenders and conveyancers, to ensure your loan is approved.
Your mortgage journey doesn’t end at settlement. As it evolves, our experts remain by your side.
If you need help with your guarantor loan or want to see if you quality for a no or low deposit home loan get in touch with us today by giving us a call or booking a free consultation.