What are guarantors for a mortgage and guarantor home loans?

As a guarantor, you allow the equity in your own property to be used as additional security for the loan being taken out by your child or relative. The primary security for the loan will be the property being financed, but the lender will also take a mortgage over your property.

This mortgage will not support the loan directly but will be used to support a guarantee from you, as the guarantor.

While becoming a guarantor can seem like the right thing to do for your loved ones, you need to fully understand the risks involved before signing up.

As a guarantor, you effectively offer to take on responsibility for the home loan if repayments can't be met. So, it pays to consider how you would cope financially if the unexpected happens, and the lender turns to you to make good on the loan. Your own financial wellbeing could be compromised - at worst, you could risk losing your own home.

It is also important to note your own ability to borrow will be reduced after you have agreed to act, so consider carefully your future plans and finance options.

The big plus for home buyers is the extra security a guarantor provides. It means you may be able to secure a home loan with just a small deposit – or even no deposit at all. It could also mean avoiding Lenders Mortgage Insurance – a saving that can run into thousands of dollars.

The lender will still check you can comfortably manage the loan repayments, but having a guarantor can fast-track you into a place of your own.

The role of a guarantor is generally limited to the immediate family members of those seeking finance. Normally, this would be a parent but guarantors can include siblings and grandparents. Some lenders will allow extended family members and even ex-spouses to be a guarantor to a loan, but this varies depending on the lender.

Your local Mortgage Choice broker can help you understand which lender best suits your needs.

Plenty of lenders offer guarantor home loans. They come under a variety of names including ‘family pledge loans’. A guarantor home loan doesn’t have to come with a higher interest rate. In many cases a guarantor loan will have the same rate as a regular home loan.

The main point is to be sure the loan is right for your needs. After all, interest rates can change. But the features of a guarantor home loan will remain in place regardless of rate movements.

The lender will still check that you can comfortably manage the mortgage repayments, but a guarantor home loan can fast-track you into a place of your own.

Each lender works differently, but in many cases you can nominate how much of the loan you're prepared to guarantee, and how long you wish to act as guarantor for. When deciding these elements, it's worth making a realistic assessment of the borrower's financial track record and job security, even if you are comfortable that the borrower is well-equipped to manage a home loan.

Often in these situations, emotion may cloud your financial judgement so it is vitally important that you seek independent legal and financial advice before accepting the role - in fact, most lenders will insist on this prior to accepting a guarantee.

A security guarantor will stay on your mortgage until your loan is refinanced, special arrangements with your lender are in place or the loan is paid off. In some cases it is possible for a guarantor to request a release from the loan in circumstances where you have built enough equity in your loan and have shown a history of servicing your mortgage repayments. The time frame for this can obviously vary as this can take a number of years depending on the original loan amount, loan type, repayments made and whether the property’s value has increased.

In some cases, depending on your lender’s specific policy and the terms of the loan, you may need to pay additional fees when requesting to release the guarantor. 

Typically the guarantor is not able to be released until you have built up equity in your loan of at least 10% or 20% to avoid paying LMI, though this can vary depending on lender requirements. 

When releasing a guarantor this will usually require an internal refinance. You can build the equity on your loan by making extra repayments to bring the loan balance down quicker or looking at ways to increase your property’s value.  

It’s important to understand that depending on lender requirements, releasing a guarantor involves refinancing your loan and can’t be done automatically, therefore your lender may need to review your financial situation during the refinancing process.

With a guarantor mortgage, you can borrow funds to purchase a property with a small deposit, under 20%, and avoid paying LMI. In some cases, you may be able to get a home loan with no deposit at all using a guarantor. 

It is best to speak with your Mortgage Choice broker, who can go through your situation and understand how much you can borrow with a guarantor.

As you can see, there's much to weigh up, and it's definitely worth speaking with us about becoming a guarantor. We understand the different requirements of each lender and will cut through the clutter to find the loan that suits your needs, as well as the needs of your loved one.