Your guide to guarantor home loans

Want to own a home soon but don’t have a big enough deposit to avoid LMI? Find out if a guarantor loan could help you secure a mortgage.

If you want to buy a property but have a low deposit, getting a guarantor could be the solution. A guarantor loan means you can skip the LMI charges and own a home sooner.

In this article, we’ll explain what guarantor home loans are, how they work, the pros and cons and what your other options could be.

What is a guarantor home loan?

If you have a low home loan deposit, or none at all, you may have to look into some different options for getting a home loan. A guarantor loan could be one such option.

With a guarantor loan, the guarantor is a third party to the loan. They will offer up some of their home equity to secure the home loan for the borrower.

The guarantor is usually a close relative, such as a parent, grandparent or sibling. They don’t need to hand over any cash when guaranteeing the loan, as they are simply adding security to the applicant's loan.

How do guarantor home loans work?

Here’s an example of how a guarantor home loan can work:

Say that you want to buy an $800,000 home but only have a deposit of $80,000. This means you have a 10% deposit, which some lenders may not consider enough to get a loan.

Alternatively, they may approve you for a loan, but force you to pay Lenders Mortgage Insurance (LMI) which can really add to the cost of your home loan.

If you want to avoid paying LMI and don’t have enough saved for a 20% deposit, you may look into getting a guarantor on your home loan.

To reach the 20% deposit benchmark, your guarantor would have to offer up $80,000 in equity to act as additional security for your home loan.

And if you fail to make your loan repayments, your guarantor may be asked to step up in your place.

What happens if you can’t repay your guarantor home loan?

One of the risks associated with a guarantor home loan is what happens if you can no longer handle your home loan repayments.

Since your guarantor is guaranteeing your loan, they will become liable to repay your mortgage in the event that you are unable to.

This is why it’s crucial to understand what you’re getting into when you apply for a guarantor loan. Make sure that your guarantor fully understands their role and obligations. If they aren’t prepared to potentially have to repay your home loan, they may not work well as a guarantor.

Can I borrow 100% of the purchase price of a home with a guarantor?

Yes, in general you can borrow up to 100% of the purchase price of a home if you are using a guarantor. Some lenders might even allow you to borrow over 100% - e.g. up to 105%

Make sure you discuss this with your lender or a mortgage broker to check whether this will be possible in your circumstances.

Can you get a guarantor for an investment property loan?

Yes, guarantor home loans are available on both owner occupier and investment home loans. Getting a guarantor for an investment property purchase means you can jump on a good investment opportunity without having to wait until you’ve saved up a 20% deposit.

How long does the guarantor stay on the loan?

In what will be good news for both the guarantor and borrower, the guarantor is not required to be a permanent fixture on the loan.

Once you repay enough of your loan and build equity, you can remove the guarantee from your loan. So, if your guarantor guaranteed 10% of your loan, they can be removed once you’ve built enough equity to cover their guaranteed portion.

Does being a guarantor affect your credit score?

Yes, if you choose to be a guarantor there is a possibility that your credit score will be affected. Here is how your credit file could be impacted:

Hard enquiry: the lender will do a hard enquiry into the guarantor’s credit history to screen their trustworthiness and likelihood to be able to handle the responsibility of being a guarantor. This enquiry will appear in their credit file and could have negative impact on their credit score if the home loan application is rejected.
Loan on your credit history: as a guarantor, the loan you’re guaranteeing will appear on your credit report. This can be a good thing and even boost your score. However, if you’re applying for other credit products (e.g. loans and credit cards) your applications could be rejected if lenders aren’t sure that you will be able to handle further debt.
What the borrower defaulting means for the guarantor: if the borrower whose loan you’re guaranteeing defaults on their loan, this could impact your credit score. Plus, you’ll be responsible for repayments. If you are not able to make these repayments, the default could be recorded in your credit file.

What are the pros and cons of getting a guarantor home loan?

While a guarantor home loan can be a great option for the right low deposit borrower, it’s good to be across the benefits and potential drawbacks.

Pros of getting a guarantor home loan

With a guarantor loan you can avoid having to pay LMI. LMI is an expensive addition to what may be the largest loan you’ll ever take out, so it’s good to avoid it if you can
You can buy sooner and take advantage of good property opportunities with a guarantor loan. This can be particularly useful in a hot property market, where homes sell quickly and you have to act fast if you want a chance
Once the value of the guarantee has been repaid or the home’s equity has increased enough, the guarantor can be removed from the loan. Once they are removed, they are no longer liable to repay the loan in the event that you aren’t able to
You may be able to borrower more money than you would otherwise be able to
Your guarantor doesn’t have to physically contribute funds to your deposit.

Cons of getting a guarantor home loan

You may still need to show evidence of genuine savings, as lenders like to see positive saving habits
If you can no longer keep up with your home loan repayments, the guarantor will be responsible for repaying your loan
There is potential for the relationship between the borrower and guarantor to sour if the guarantor is forced to make the repayments
The guarantor’s borrowing power – including borrowing against their own equity as well as taking out new loans or credit cards – could become more limited
If the borrower defaults and neither party is able to repay the loan, there is a chance that the guarantor could lose their property as it was the asset used to guarantee the borrower’s loan.

Should you go guarantor on a home loan?

There isn’t a simple answer to this question. If a loved one has asked you to act as a guarantor on their home loan, it’s essential for you to closely assess the level of risk to your finances and personal relationship with the borrower.

Remember that just because you can, it doesn’t mean you should. If you have concerns about the maturity or financial habits of the borrower, it may be better to avoid going guarantor on their loan.

Before you commit to being a guarantor, it may be worth it for all parties to speak to a financial advisor. While we all want to help out our family as much as possible, it’s important to think about the bigger picture when making such big decisions.

Consider:

What would it realistically be like to handle the borrower’s repayments on top of your own financial commitments, should it come to that?
Are you prepared for the worst to happen? E.g. possibly losing your house.
Is the borrower someone who is reliable and ready to handle a home loan? You don’t want to go guarantor for someone who is likely to let you down.

What other low deposit home loan options are there?

For low deposit borrowers who don’t want to get a guarantor, there may still be some low deposit home loan options out there.

Some lenders offer home loans to lenders with deposits as low as 5%! You may be required to pay LMI, but if owning a property soon is a priority, it could be worth it. To learn more about low deposit home loan options, book an appointment with your local FND Broker.

But if you want to avoid the LMI charges, it’s a good idea to see if you’re eligible for any of the Home Guarantee schemes. These are government schemes for first home buyers, rural buyers and single parents wanting to buy a home with a low deposit while avoiding LMI.

Thinking about getting a guarantor on your home loan or want to find out if you can get a loan with a low deposit? Book a free appointment with an FND Broker.