Guarantor Home Loan – Can my family help?

A guarantor allows you to purchase a property sooner and potentially save thousands of dollars.

By using the equity they’ve built up in an existing property, a guarantor can help you to buy a home or invest in residential property – and the best part is, they don’t need to actually provide you with any cash.

One of the most popular reasons that purchasers use guarantors is to avoid paying Lenders Mortgage Insurance (LMI). This is a form of insurance that protects lenders from borrowers defaulting on loan repayments and is payable if you only have a small deposit. Your guarantor helps you avoid this charge by providing a guarantee for your home loan which is secured on their property.

Who can use a guarantor?

The most common need for a guarantor is if you are a first home buyer who has a steady income and can service a home loan without assistance, but you haven’t been able to save up the necessary deposit.

If you don’t have at least a 20% deposit, you may have to pay Lenders Mortgage Insurance (LMI), which can be as much as $20,000, so having someone who is prepared to guarantee your loan means you can borrow up to 100% of a property’s value plus purchase costs and not have to pay LMI.

It also means you can get a foothold in the property market sooner rather than later, because if you had to continue saving for a deposit while housing prices continued to rise, you might never have enough deposit to secure your home loan.

Who can be a guarantor?

Guarantors are typically parents who want to help their children get a foothold in the property market. However, some lenders may also accept other family members such as step-parents, parents-in-law, grandparents, siblings, spouses, or de facto partners as guarantors.

Each lender has different eligibility criteria, the following may apply to potential guarantors:

• Age – they must be over 18 and there may be an age limit.
• Residency – they must be an Australian citizen or permanent resident.
• Finances – they must have suitable equity in their property and possibly stable income.
• Credit – they might need to have a good personal credit rating.

What are the benefits of using a guarantor?

With market conditions becoming more difficult for first home buyers, more young couples are turning to their families to help them qualify for their first mortgage. And there are a lot of advantages in doing so.

Having a guarantor means you don’t need to save as big a deposit and because you can borrow more, you may be able to buy a larger property than you originally planned. As previously mentioned, you can also avoid having to pay Lenders Mortgage Insurance (LMI), which can add a sizeable chunk to the cost of securing a home loan.

A further advantage is that some lenders will allow you to consolidate some minor debts into your new mortgage such as personal loans and credit cards, as long as they make up no more than 5 – 10% of the purchase price.

And finally, a security guarantee is flexible enough that a guarantor can choose a limited amount of liability and can be released from the loan at a mutually agreed time, so the borrower doesn’t have to feel obliged to their guarantor for any longer than necessary.

What are the drawbacks of using a guarantor?

The main drawback of using a guarantor is that you are putting the Guarantor’s property at risk. While in most cases that risk is minimal, given that you should be well equipped to pay off the loan and only need some help with the deposit, the risk is there nonetheless.

You could get sick or lose your job tomorrow and the lender would then turn to your guarantor for their loan repayments. It is for this reason that anyone considering going guarantor for someone should seek legal advice before doing so.

It is a major financial decision and should not be entered into lightly and a solicitor can explain your legal rights and obligations and advise on the most prudent way forward.

When can I remove the guarantee?

Ideally, the guaranteed amount should not be the entire amount of the loan, but only the portion needed to secure it, and the guarantee should not be in place for any longer than absolutely necessary.

The borrower and guarantor should apply to the lender to remove the guarantee when the loan amount has been reduced to 80% or less of the property value. This should be achievable in two to five years, particularly if the property has increased in value during that period.

Each lender has a different set of policy and requirements for guarantor loans. The above general information is to be used as a guide only.