Securing a home loan can be challenging, especially if you don't meet a financiers typical lending criteria. That's where a Guarantor for a home loan can make a significant difference.
A Guarantor can play a vital role in helping you obtain a home loan by providing additional security to the lender. However, the concept of a Guarantor and the responsibilities involved can be complex and often raise several important questions.
Whether you're considering becoming a Guarantor for a home loan or you're a borrower exploring this option, understanding the ins and outs of Home Loan Guarantors is essential for making informed decisions. In this guide, we'll address some frequently asked questions about Home Loan Guarantors, unravel the process, and shed light on the responsibilities involved.
What is a Guarantor on a Home Loan?
A Guarantor on a Home Loan is a person who provides a guarantee to the lender for the repayment of a borrower's home loan. By acting as a Guarantor for a home loan, this individual assumes legal responsibility for the loan if the borrower fails to meet their repayment obligations. This arrangement is often utilised when a borrower does not meet the typical lending criteria, such as having a low deposit or limited credit history.
The Guarantor for a home loan is usually a family member or close relative who has sufficient equity in their own property to support the loan. Their property is usually used as security or collateral for the borrower's loan, providing additional assurance to the lender. By leveraging the Guarantor's equity, the borrower may avoid paying Lenders Mortgage Insurance (LMI), or obtain more favourable loan terms.
Refinancing home loans with a Guarantor is also a possibility for borrowers who wish to reassess their existing loan arrangements. With the help of a Guarantor, borrowers may be able to access better refinancing options, particularly if their financial circumstances have improved since the original loan was obtained.
Who Can Typically be a Guarantor?
There are different types of Guarantors that can be involved in a home loan. That being said, the following types of Guarantors are commonly encountered:
- Parent Guarantor: Parents Guarantor home loan is the most common type. It typically involves a parent or parents acting as Guarantors for their child's home loan. The parents provide their property as collateral to support the loan.
- Family Member Guarantor: Other close family members such as siblings, grandparents, or even spouses can act as Guarantors. They offer their property as security for the borrower's loan.
How Does a Home Loan Guarantee Work?
A Home Loan Guarantee works by providing additional security and support to the borrower's loan application. When a borrower seeks a home loan but doesn't meet certain lending criteria, such as a low deposit or limited credit history, a Guarantor steps in to strengthen the application. Typical Home Loan Guarantee requirements mean that a Guarantor is usually a family member, such as a parent, who offers their own property as collateral for the loan. This means that if the borrower fails to repay the loan, the Guarantor becomes legally responsible for the outstanding amount.
Having a Guarantor reduces the risk for the lender, allowing the borrower to obtain better interest rates, and/or avoid paying Lenders Mortgage Insurance (LMI).
Learn more about how the process works in our Home Loan Guarantor guide.
What Are Home Loan Guarantor Requirements?
Home Loan Guarantor requirements may vary depending on the lending institution and the loan product. Here are some common requirements typically associated with being a Home Loan Guarantor:
- Equity in Property: The Guarantor is usually required to own a property with sufficient equity to support the borrower's loan. The equity acts as collateral for the loan.
- Financial Stability: Guarantors are typically expected to demonstrate financial stability and the ability to meet repayment obligations if necessary. This may include providing evidence of regular income, a stable employment history, and a good credit rating.
- Legal Capacity: The Guarantor must have the legal capacity to enter into a Guarantor agreement. This typically means being of legal age and not being subject to any legal restrictions or limitations.
- Independent Legal and Financial Advice: Many lending institutions require Guarantors to seek independent legal and financial advice before entering into a Guarantor arrangement. This is to ensure that the Guarantor fully understands their obligations, risks, and rights.
How Can A Guarantor Exit?
A Guarantor can typically exit their role in a home loan agreement through a process called "Guarantor release". This generally occurs when certain conditions are met, such as the borrower demonstrating a good repayment history, reaching a specified loan-to-value ratio, or refinancing the loan in their own name. The specific requirements and process for Guarantor release may vary depending on the lending institution and the terms of the loan agreement.
It is advisable for the Guarantor to consult with the lender and seek independent legal advice to understand the specific conditions and steps involved in exiting their role as a Guarantor.
Alternatives to Home Loan Guarantors:
If a Home Loan Guarantor arrangement is not feasible or preferred, there are alternative options to consider. Here are some common alternatives to Home Loan Guarantors:
- Increase Deposit: Instead of relying on a Guarantor for a home loan, the borrower can work towards saving a larger deposit. A higher deposit can potentially help meet the loan requirements and improve the loan terms.
- Lenders Mortgage Insurance (LMI): LMI is a type of insurance that protects the lender in case the borrower defaults on the loan. By paying LMI, borrowers with a smaller deposit can still obtain a home loan without requiring a Guarantor. You can learn more about LMI and its implications in our article ‘Lender’s Mortgage Insurance Explained’.
- Co-Borrowers: Rather than having a Guarantor, borrowers may choose to have a co-borrower on the loan. A co-borrower is equally responsible for the loan and shares the repayment obligations. This option is suitable for individuals who have a reliable and eligible partner or family member willing to share the loan responsibilities. This person must also benefit directly from the loan transaction.
Choosing the right path for your home loan needs is important, and we’re here to help. Contact us today to speak with one of our expert lending specialists who can provide you with loan options.
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.
Qudos Mutual Limited trading as Qudos Bank ABN 53 087 650 557 AFSL/Australian Credit Licence 238 305.
Published October 2023