If you're ready to get onto the property ladder and have family willing to help you with your loan, a Guarantor home loan may be a good option for you. It can help you get into the market sooner, avoid LMI premiums and boost your borrowing capacity. But, a guarantor loan can be a complicated arrangement, and it's a major commitment for your family. Read below for the pros and cons of 'going guarantor'.
Read our guide to guarantors if you're considering becoming a guarantor for a family member.
What is a guarantor home loan?
- Guarantor home loans are a type of home loan that allows borrowers to access a home loan with a smaller deposit, typically with the help of a guarantor.
- The guarantor is someone who offers their home as security for the loan, allowing the borrower to access a home loan faster and potentially avoid paying lenders mortgage insurance (LMI).
- This type of loan is also known as a guarantor loan or a family guarantee loan.
- In the event of a default, the lender can repossess your family's home to recoup any loss they've incurred.
Benefits of a guarantor home loan
- Avoid paying lenders mortgage insurance (LMI), which can save you thousands of dollars.
- Access a home loan faster, even with a smaller deposit. A guarantor is only responsible for the portion of the loan they have pledged as security, not the entire loan amount.
- Potentially lower interest rates due to the reduced risk for the lender.
- Increased borrowing power, as the guarantor’s home equity is used to secure the loan.
- Flexibility in loan terms and conditions.
How a guarantor home loan works
- The guarantor’s home is used as security for the loan, which means that if the borrower defaults on the loan, the guarantor’s home can be used to repay the debt.
- The guarantor’s home equity is combined with the borrower’s deposit to create a 20% deposit, which allows the borrower to avoid paying LMI.
- The guarantor is not responsible for the borrower’s monthly repayments, but is liable for the amount they pledged, not the entire loan amount, if the borrower defaults.
- The loan is typically structured as two separate loans: one for the borrower and one for the guarantor.
Who can be a guarantor?
- A family member, such as a parent, sibling, or child, can be a home loan guarantor. The role of a home loan guarantor involves significant responsibilities, including securing the guaranteed sum through home equity or cash deposits. It is crucial for the guarantor to understand these responsibilities and seek legal advice before committing.
- An immediate family member can be a guarantor, but it’s essential to check that they understand the benefits and risks and are confident about their current and future financial situation.
Guarantor home loan requirements
To qualify for a guarantor home loan, both the borrower and the guarantor must meet specific criteria. These requirements can vary by lender, but generally include the following:
For the borrower:
- Citizenship: The borrower must be an Australian citizen or permanent resident.
- Income and Credit History: A stable income and a good credit history are essential to demonstrate the ability to repay the loan.
- Deposit: While a traditional home loan might require a 20% deposit, a guarantor home loan can allow for a deposit as low as 5% of the property value.
For the guarantor:
- Family Member: The guarantor must be an immediate family member, such as a parent, sibling, or child.
- Equity: The guarantor must have sufficient equity in their own property to secure the loan.
- Credit and Income: Like the borrower, the guarantor must have a good credit history and a stable income to ensure they can cover the loan if necessary.
Additionally, the loan to value ratio (LVR) must be 80% or less. This means the combined deposit and the guarantor’s equity should cover at least 20% of the property’s value, reducing the lender’s risk and potentially avoiding the need to pay lenders mortgage insurance.
Risks of being a guarantor
There are several risks of being a Guarantor.
- The guarantor’s home can be used to repay the debt if the borrower defaults.
- The guarantor may be responsible for paying the borrower’s home loan if they can’t make repayments.
- It’s essential to get independent financial and legal advice before becoming a guarantor.
- The loan value affects the guarantor's risk, as a higher loan-to-value ratio (LVR) increases the financial implications of their commitment.
According to CBA, "Acting as guarantor for a borrower means you agree to repay the home loan if the borrower can’t meet the repayment terms and conditions of their loan contract. If we need to seek any security you’ve provided in support of the guarantee, you could lose your property and/or suffer other serious financial losses. Your credit report may also be negatively affected."
Alternatives to using a guarantor
- Government initiatives, such as the First Home Guarantee, Regional First Home Buyer Guarantee, and Family Home Guarantee.
- Low deposit home loans, with LMI, which allow borrowers to take out loans with a small deposit.
- Deposit loans may be a great alternative to a guarantor home loan.
- Borrowers can also seek financing for an investment property as an alternative to using a guarantor.
Guarantor home loan vs. other home loans
- A guarantor home loan is different from a traditional home loan, as it uses the guarantor’s home equity as security.
- A guarantor home loan is also different from a low deposit home loan, as it requires a guarantor to secure the loan.
- A guarantor home loan may have different interest rates and fees compared to other home loans.
- Home lending specialists can assist borrowers in navigating their options and choosing the right loan, ensuring they understand the benefits and requirements of a guarantor home loan.
Applying for a guarantor home loan
Applying for a guarantor home loan is a relatively straightforward process, but it involves several key steps:
- Initial Consultation: The borrower and guarantor meet with a home lending specialist to discuss their options and determine eligibility.
- Document Submission: Both parties need to provide financial documents, including pay slips, bank statements, and tax returns, to support their application.
- Assessment: The lender will evaluate the borrower’s creditworthiness and the guarantor’s ability to repay the loan if needed. This includes assessing the property value and ensuring the loan to value ratio is within acceptable limits.
- Approval: If the application meets the lender’s criteria, it will be approved. The borrower and guarantor will then receive a loan offer.
- Signing Agreements: Both the borrower and the guarantor must sign the loan agreement and the guarantee agreement, formalising their commitments.
- Disbursement and Repayments: Once the agreements are signed, the loan is disbursed, and the borrower begins making repayments.
Throughout this process, it’s crucial to maintain open communication with the lender and provide all required documentation promptly to avoid delays.
Understanding the family home guarantee
- A Family Home Guarantee is when a family member agrees to secure the borrower’s home loan, taking on debt responsibility if the borrower doesn’t pay.
- The family member guaranteeing payment is known as a ‘guarantor’. The guarantor must cover the guaranteed loan amount, and a term deposit can sometimes serve as a security guarantee for the home loan.
- The Family Home Guarantee is structured as two separate loans: one for the borrower and one for the guarantor.
- The guarantor’s property is used as security for the guarantor’s loan.
Guarantor loans and home loans: What’s the difference?
- A guarantor loan is a type of loan that uses the guarantor’s home equity as security. Unlike a home loan, the guarantor is only at risk for the amount they pledged, not the entire loan amount.
- A home loan is a type of loan that is secured by the borrower’s property.
- A guarantor loan may have different interest rates and fees compared to a home loan.
Is a guarantor right for you?
Curious if you're eligible for a Guarantor home loan? At Felix Finance, we can help you understand the process for you and your family members - and ensure you're getting the best deal for your home loan. Book in your strategy session, and begin your journey to financial freedom.
