What is a guarantor home loan?
There’s no such thing as a specific ‘guarantor home loan’, rather there are normal home loans that allow your guarantor — a person other than the purchaser, typically a close family member like a parent, who agrees to ‘guarantee’ the loan by offering up something of theirs as security (usually some of their own home equity).
Home loan guarantors are often used by first home buyers looking to get a foot on the property ladder, but who only have a low deposit saved.
This type of loan arrangement is different to what's often called a ‘parent assist’ home loan, in which a parent or guardian helps finance the purchase of the property, either by contributing to a deposit or becoming a co-borrower.
How does a home loan guarantor work?
When you purchase a home with a small deposit (normally considered to be anything less than 20%) you’ll likely have to pay often-costly lenders mortgage insurance (LMI). Having someone who’s willing to act as your home loan guarantor can help you avoid this.
Your home loan guarantor doesn’t have to contribute any cash to your property purchase. Rather, they contribute additional security for your loan, which can help effectively take you up to the equivalent of a 20% deposit or more.
As the homeowner you’ll still be the main person responsible for making regular home loan repayments (including interest and any fees). But if you fail to meet those repayments, your lender may turn to your guarantor, asking them to pay off the remaining debt. This is what it means to ‘guarantee’ a home loan.
It’s worth noting the guarantor doesn’t necessarily have to back all of your loan. They may have the option to act as guarantor for a specific portion. For example, if you have a 10% deposit, they might go guarantor on just 10% of the loan, bringing your effective contribution up to 20%.
This would mean once you’ve repaid that portion, the guarantor can be free from any further obligations – and from any personal financial risk should you miss repayments down the track.
What types of guarantors are there?
Not all lenders offer guarantor home loan arrangements, but among those that do, many require your guarantor to be an immediate family member, like a parent or partner. Other lenders may allow siblings or grandparents to serve as home loan guarantors.
Lenders generally like to see a strong relationship between you and your guarantor. If you plan to ask, say, an aunt or uncle, they may need to sign a statutory declaration confirming they have a close relationship with you.
The person you choose to be your home loan guarantor will usually also need to be assessed themselves, which means they may have to be earning an income or be able to show how they’d repay your debt if you default, and might need to have a good credit history.
How much can I borrow with a home loan guarantor?
Some lenders may let you borrow up to 100% of the value of the property you’re buying if you have a guarantor. This depends on the lender, your financial standing as a potential borrower, and the circumstances of your proposed guarantor or guarantors, as well as other factors such as the size of your loan.
As with any home loan, your lender will still consider whether you can afford your loan repayments. Some lenders may also require you to save a certain amount towards the deposit, say 5%, in ‘genuine savings’ (money you’ve gradually saved yourself), even if you have a guarantor.
Before applying for a home loan or asking someone to go guarantor for you, it’s worth taking a deep dive into your income and living expenses to ensure you have the capacity to repay the loan and have some wiggle room for unexpected expenses.
Having a lower deposit (and thereby needing a guarantor) likely means taking out a bigger home loan. This can lead to higher loan repayments, and it’s important to be sure you can comfortably manage these.
It’s also a good idea to confirm with your guarantor the amount they’re willing to secure your mortgage by ahead of entering any formal agreement. In fact, lenders tend to require or recommend that anyone raising a hand to act as guarantor seeks independent legal advice before doing so.
What are the pros and cons of a home loan guarantor?
It’s a good idea for home buyers and guarantors to carefully weigh up the advantages and drawbacks of a guarantor home loan. Here are some points to consider:
Pros
- A chance to buy a home with a smaller deposit: Having a guarantor could help you secure funding from a lender without a large enough deposit. This may mean being able to buy your first home sooner.
- Saving on LMI: Having a guarantor can help you avoid LMI, which is a cost that can run into the thousands.
- Guarantors don’t have to contribute cash to the home purchase: The guarantor isn’t usually required to hand over any cash for the purchase of the home.
Cons
- The loan could end up costing you more: If you use a guarantor to buy with a smaller deposit, thereby taking out a larger home loan, the home loan could end up costing you more in the long run since you’ll be paying interest on a larger portion of the property’s value.
- The guarantor could be asked to repay all or part of the loan: Agreeing to be a guarantor is not just a formality, as you may be liable to pay off some or all of the mortgage if the borrower is unable to. Any potential guarantors should carefully consider the decision to become one, as it could put their hard-earned savings and potentially their own home at risk.
- The guarantor’s ability to take out a loan can be impacted: Agreeing to act as a guarantor may limit your ability to take out a loan yourself.
- Your relationship with your guarantor can be impacted if things go wrong: If your guarantor is called on to pay off the loan, your relationship could become strained.
Can having a guarantor help me get a lower home loan rate?
Since your loan-to-value ratio (LVR) is tied directly to the value of the property you’re buying and your deposit size, having another property tied to the loan won’t change this actual figure. Though, some lenders may allow a cash security from your guarantor to influence your 'effective' LVR, as adding extra security to a loan can mean you represent less risk as a borrower.
This means you may be able to access lower rates with a guarantor. However, your LVR may still be a barrier to accessing certain lower rate loan products, even with a guarantor.
If you’re a first home buyer you may also be able to access special first home buyer rates from some lenders.
What are some other ways my family could help me buy a house?
If a home loan guarantor doesn’t sound like the right option for you but you still need help to get on the property ladder, there are other ways your family could lend a hand.
They could contribute money towards your deposit, which may allow you to put down a 20% deposit and avoid paying LMI. Your lender may ask whether the money was a loan or a gift, and if it’s a loan, it will factor that into its decision to approve or decline your home loan application.
You could also move back to the family home to cut down on expenses like rent and bills, allowing you to put extra savings towards a deposit.
Another option is to borrow alongside a family member. Co-signing a home loan with your parent or another person means you would both be legally responsible for the loan repayments, but they wouldn’t have to put up their house as security. Keep in mind, though, co-signing a home loan with an existing home owner or someone who’s owned property before could potentially impact your eligibility for any first home owner grants or concessions.
What is the 5% Deposit Scheme?
First home buyers may also consider utilising the Federal Government’s 5% Deposit Scheme, formerly called the First Home Guarantee or the First Home Loan Deposit Scheme.
This scheme allows eligible first home buyers to purchase a home with a deposit as small as 5% (or 2% for single parents and legal guardians) without having to pay LMI. This sees the Federal Government effectively acting as guarantor for up to 15% of the home’s purchase price. While income and application caps have been removed, property price caps do apply, and these can vary depending on where you’re looking to buy.
To be eligible for the scheme, you must not have owned, or had an interest in, a property or land in Australia in the last 10 years. You must also use the property you’re buying as your primary place of residence.
