What are guarantors for a mortgage and guarantor home loans?

A guarantor loan can help first home buyers buy a place of their own even with a small deposit. Here’s what you need to know about a guarantor home loan.

What is a guarantor on a mortgage?

A guarantor on a mortgage is the person who provides the additional security for your home loan. Most lenders prefer the guarantor to be a close relative – usually a parent, grandparent or siblings.

Some lenders will allow extended family members and even ex-spouses to be a guarantor for your loan. This varies depending on the lender.

Your guarantor doesn’t need to provide any cash payment. No money changes hands with a guarantee.

Instead, the guarantor agrees to offer part of their home equity to top up your cash deposit. In this way, a guarantor home loan can let first home buyers buy a place of their own far sooner. 

How does a guarantor home loan work?

When it comes to buying a first home, saving a deposit is hard work – and it takes time. 

A guarantor home loan can be a way to get into the market sooner. You may only need a small deposit. In some cases, you may not need a deposit at all.

That’s because a guarantor – usually a family member, offers equity in their own home as additional security for your loan.

A guarantor home loan can also be a way to avoid the cost of lenders mortgage insurance (LMI). It’s a saving that can be worth thousands of dollars.

Example of how a guarantor home loan works

Let’s say that you want to buy a place costing $500,000. You have saved a deposit of $50,000. That’s equal to 10% of the property’s value. 

Unless you have a deposit of at least 20%, or $100,000 in this example, the lender will ask you to pay LMI. Instead of waiting to save an additional $50,000, a guarantor home loan can offer a solution. 

We’ll say a guarantor offers $50,000 of their own home equity as extra security for your loan. This will give you the 20% security you need to buy the property today without paying LMI.

The guarantor isn't required to make any payments on your loan. But if you can no longer keep up your repayments, the lender will turn to the guarantor to make the repayments. In this way, it’s possible to get a home loan even when you have a small deposit.


Understanding guarantors guide

Buying a property is one of the biggest financial commitments you’ll make. A guarantor might be the helping hand you need to get into property sooner. We explain in this guide what a guarantor is, who they are, and how you can benefit.

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What does a guarantor on a mortgage do?

Saving a decent home-buying deposit can be difficult … especially if you’re renting. But there is a solution that could get you over the line sooner - having a ‘guarantor’.

Watch this short video to find out what a guarantor is, and how they might help you get into your own home, sooner.

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Considering becoming a guarantor?

Common questions about becoming a guarantor

To be eligible for a guarantor home loan, you will need to have a family member willing to act as guarantor. 

The guarantor will also need to be a home owner. That’s because their home equity forms part of the security for your first home loan. Home equity is the difference between the value of their property and the balance remaining on their home loan. 

Agreeing to be a guarantor is a big decision. If you cannot keep up the repayments on your loan, the lender can ask the guarantor to pay off your home loan.

That’s why anyone who is considering being a guarantor for a home loan should seek independent legal and financial advice before accepting the role. Most lenders will insist on this, prior to accepting a guarantee.

Guarantors are generally limited to immediate family members. 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.

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.

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.

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How will having a guarantor help your loan application?

If you don't have enough deposit but do have the ability to make the required home loan repayments, a guarantor could help you to secure additional funds to buy a home.

Saving a deposit can be daunting and very hard to do when you're also paying rent. By having a guarantor, you may be able to borrow the full purchase price and sometimes even the costs associated with purchasing property. This varies across lenders - some will still insist that you contribute some of your own equity towards the purchase, even if you have a guarantor.

Another benefit of having a guarantor is that you may save thousands of dollars by avoiding Lenders Mortgage Insurance (LMI). Generally LMI is required for home loans where you have less than 20% deposit i.e. the loan is greater than 80% of the value of the property. LMI is a type of insurance which lenders take out to cover the additional risk of high Loan to Value Ratio (LVR) lending. Although this insurance covers the lender against the risk of you defaulting on your loan, you pay the premium.

The amount of the guarantee depends on the individual lender's policies. The guarantee can vary from the full loan amount to as little as 20% of the loan (where the loan is for 100% of the purchase price).

After you've built up equity in your property, your guarantor can ask to be released from the loan. The timeframe to achieve this varies depending on the original deposit, the number of extra repayments made and whether your property has appreciated in value over the time period.

Depending on the lender, you may be required to pay some additional fees to release your guarantor. This can include a fee for the lender to revalue the primary security property as well as lender discharge fees.

Example of avoiding LMI due to guarantor providing security

Say you wish to purchase a $400,000 property and will need to borrow $380,000. This loan has an LVR of 95%, which means you'd need to pay Lenders Mortgage Insurance (LMI).

If a family member is willing to provide a guarantee for your home loan, using the equity in their own property as additional security, the LVR would reduce and you'd avoid the need to pay LMI, saving you approximately $11,600.

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