What is a guarantor?
A guarantor 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 a guarantor home loan works
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.
Here’s how it 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.