When you’re trying to enter the property market, saving enough money to cover the deposit may seem like an endless cycle of budgeting, working and cutting down on frivolous costs. The fact that most lenders require you to pay a 20% deposit in order to avoid paying Lenders Mortgage Insurance (LMI) can feel demoralising when you’re balancing saving with everyday spending.
Applying for a home loan with a guarantor could remove some of the roadblocks first home buyers encounter as they try to enter the property market. This means that with a home loan guarantor, young Australians may be able to enter the property market more swiftly than they anticipated.
That’s not to say that you should immediately call your family members to discuss the possibility of getting a home loan with a guarantor. The fact that both the guarantor and borrower are liable under this arrangement introduces certain complexities that you must consider before signing a loan guarantee.
What is a guarantor home loan?
With a guarantor on a home loan, homebuyers may be able to avoid paying a high deposit and the cost of LMI.
Generally speaking, under a home loan with a guarantor, the guarantor will agree for you to use their property as additional security for your loan.
Guarantor home loans can be a popular choice for first time homebuyers as they can provide them with a stronger foothold to enter the property market sooner than they would have been able to otherwise.
How does a guarantor loan work?
When a guarantor loan is taken out, the guarantor guarantees the payment to the lender of the borrower’s debt. The debt being the money owing at any time by the borrower to the lender in relation to the loan provided by the lender. The security given by the guarantor secures performance of the guarantor’s obligations (i.e. the guarantee).
Unsure how much money you could borrow with your current income? Use our home loan calculators to gain a clearer picture of how a guarantor loan could influence your home loan process.
Information For Borrowers:
What are the benefits of guarantor home loans?
For first time homebuyers, there are numerous benefits associated with securing a home loan guarantor.
Guarantor home loans may enable you to enter the property market sooner as they can sometimes remove the need to wait long periods while saving for a larger deposit. This is particularly useful when set amidst the context of a rising housing market.
Additionally, a guarantor home loan can allow homebuyers to avoid paying LMI. LMI is generally a condition of the loan if a homebuyer borrows over 80% of a property’s value.
What is an example of a typical home loan guarantor?
Here’s a hypothetical scenario of how a home loan guarantor works:
Caitlin found her dream apartment in her dream suburb. There is just one problem: it costs $700,000. She only has $70,000 saved, giving her only half of the amount needed to cover the deposit of 20%. Ideally, she’d also like to avoid paying LMI so she can put that money towards buying furniture for her new home.
As Caitlin’s parents own a home valued at $1.2 million, they offer to provide a guarantee. They will also provide their home as security for this guarantee. Now, hopefully, Caitlin can borrow the money she needs to buy her dream home without paying LMI.
Later down the line when Cailtin’s equity in the property amounts to 20% (either because she’s paid that amount off her mortgage or the property value has increased), she and her parents may be able to discuss removing the guarantee with the lender.
Who can be my guarantor?
A guarantor is a person who provides a guarantee for the borrower’s debt and provides additional security for the home loan. Most of the time, guarantors are the parents of the homebuyer as lenders generally prefer the guarantor to be a close relative of the borrower.
Exceptions can sometimes be made in light of the borrower’s personal circumstances. In these instances, a guarantor could be another relative or friend.
What else should I consider?
There are plenty of benefits and risks associated with acquiring a guarantor home loan. Before you ask someone to be a guarantor, it’s recommended that you get in contact with a lender to discuss different home loan offers and options so you can better understand the implications of a guarantor home loan. You may also consider obtaining independent legal advice.
Information For Guarantors:
What does it mean to be a home loan guarantor?
As a home loan guarantor, you are making a legal commitment (a guarantee) to a lender that the borrower’s debt will be paid as required under the loan contract. Your liability will usually be limited to a specific amount, plus interest, costs, charges and any other amount that can be debited pursuant to the loan contract. You will likely have to give a security (generally a mortgage over your house) to support this guarantee.
If the borrower fails to repay the loan, you will be required to pay the debt up to your specified liability under the guarantee. This could result in the lender repossessing your security if you do not make the guaranteed payment.
Guarantor home loan interest rates can vary depending on the lender you choose, but are typically identical to regular home loans.
What are guarantor loan requirements?
Lenders have different requirements for home loan guarantors. Generally, lenders will require guarantors to:
- be over the age of 18
- be an Australian citizen or permanent resident
- have a good personal credit rating
- possess suitable property equity and a stable income.
No cash will change hands upon the signing of a guarantor home loan. Instead, the borrower will be required to repay their loan independently from the guarantor. It is only if the borrower is unable to pay that a lender may exercise their rights under the guarantee.
What are some home loan guarantor risks?
There are several personal and financial risks that home loan guarantors may face.
One of the major risks to consider is that a guarantor may become liable in the case that the borrower is unable to make repayments. If a guarantor does not have sufficient liquid assets to make the guarantee payment, their security may be at risk of repossession.
In terms of personal risks, agreeing to become a home loan guarantor can result in familial tensions if the borrower is unable to consistently source enough income to pay off their loan.
What is a parental guarantee?
A parent guarantor home loan is where the parent/s act as guarantor/s. Parents acting as guarantors on mortgages is the most common guarantor arrangement.
When can a guarantor be released?
This varies from lender to lender. A lender may release a guarantor once the borrower has an 80% LVR.
What does Qudos offer?
What is a limited guarantee?
Qudos Bank offers a limited guarantee under parental or family guarantees.
As discussed above, a limited guarantee is where the guarantee is limited to a specific amount.
Have questions? Get in contact!
Unsure whether a guarantor home loan is right for you? Reach out to our team who will gladly talk you through your options and help you make a decision that is right for your financial situation.
Loans are subject to approval. Normal lending criteria, terms and conditions and fees and charges apply. Mortgage insurance is required for home loans over 80% and is subject to approval.
You should read and consider the relevant terms and conditions and our Financial Services Guide available on our website qudosbank.com.au, before deciding whether to obtain any of our financial products or services.
The information on this page is of a general nature and is not intended to be a substitute for personal advice. This information has been produced without taking into account your personal financial circumstances, objectives or needs. You should consider the appropriateness of the information to your financial situation and seek personal advice before acting on any of this information. Qudos Mutual Limited trading as Qudos Bank ABN 53 087 650 557 AFSL/Australian Credit Licence 238 305.
Published October 2022
