What Is A Guarantor Home Loan?

By Matthew Kenworthy | First Home Buyers

Guarantor home loans are one of the few ways to borrow 100% of the purchase price of a home. Many lenders will not only allow you to borrow the full value of the home but also for associated purchasing costs such as stamp duty.

What does a Guarantor do?

A guarantor home loan is when another person puts up a property they own as security for your home loan. This is known as giving a Security Guarantee. The person giving the security guarantee will usually need to be a family member.

Giving a security guarantee a serious matter and not to be entered into lightly. Ultimately, if something was to go wrong and you were unable to pay your home loan the bank has the right to recover the amount guaranteed. This could potentially mean selling their property.

Guarantor home loans are a solution for applicants who do not have strong savings. A common misconception is that a security guarantee is for borrowers who’s income is not high enough to qualify for a loan (this is known as a servicing guarantee).

In fact, it is desirable that applicants using a security guarantee have higher than average income. This will allow them to pay down the loan sooner to release the security guarantee.

Who Uses A Guarantor Home Loan

Guarantor home loans are most often used by first home buyers who do not have a sufficient home loan deposit. Even if they do have a deposit first home buyers may still elect to use a security guarantee to eliminate lenders mortgage insurance costs.

A guarantor home loan is also occasionally used by ‘next home buyers’ looking to re-enter the property market. There is a large group of people in the market who sold their homes during the global financial crisis and are now looking to get out of renting

Often next home buyers have to save even more than first home buyers due to having to pay extra property purchase costs such as stamp duty. A security guarantee will allow them to re-enter the market quicker than if they were to save the extra themselves.

Who Can Go Guarantor

The requirements to go guarantor on a home loan vary from lender to lender. This is where using a mortgage broker familiar with the nuances of security guarantees can be advantageous.

Most importantly, the person needs to have sufficient equity in their home. If they own their home outright this should not be a problem. However, if they have a mortgage their property needs to be worth enough to keep the combined debt they have against it and the amount they are guaranteeing below 80% of their property’s value. There are some small exceptions to this.

If your parents own a house worth $500,000 and owe $450,000 on it they are unlikely to be able to guarantor for you. Alternatively if they only owe $250,000 they may be a suitable candidate.

Some banks will require that the guarantor is working and has the ability to repay the guarantee if the worst happens. Other lenders are more liberal in how they assess guarantors. Some are even willing to allow pensioners to go guarantor for their children if necessary.

The last thing a bank wants to do is take control and sell a guarantors personal property. For this reason, most banks would prefer the guarantee to be secured by an investment property rather than owner-occupied. Some lenders require this whereas others do not have an issue with property the guarantors are living in.

How To Best Protect the Guarantors

In our experience all security guarantees are entered into with the best intentions. No borrower ever wants the guarantor put at unnecessary risk for their gain.

For this reason it is important to structure the guarantee to best protect the guarantor. Ways to do this include:

  • Ensuring the guarantee is a limited guarantee for the minimum amount. This means that if worse does come to worse the bank will only have claim to the amount guaranteed. Even if the guarantors property was to be sold they would not lose everything.
  • Setting up the guarantee against an investment property if possible. This way the family home is not at risk if the worst happens.
  • Most lenders will require the guarantor to seek independent legal advice. This help ensure the guarantor fully understands the consequences of giving a guarantee.

Removing the Security Guarantee

Security guarantees should not be in place for the entire loan term. Once you’ve either paid down the loan sufficiently or your property has increased in value sufficiently you can apply to have the guarantor released.

Requirements for this include:

  • Good conduct has been maintained on your loan (i.e. no missed repayments).
  • Your income is still sufficient to make loan repayments.
  • The loan amount is for no more than 95% of the property’s value (ideally under 80% of it’s value to avoid mortgage insurance charges).

Differences Between Lenders

Not all lenders will accept security guarantees and there are vast differences in the credit policy between them. Examples in differences include:

  • Whether investment or owner-occupied property will be accepted.
  • If the guarantor is required to be working.
  • If the guarantor is required to show they can repay the guaranteed amount or the entire loan amount.

The approval process for guarantor home loans can also take longer than a standard home loan. This is due to the lender needing to value more than one property as well as assess more applicants. For this reason a pre-approval is strongly recommended prior to placing an offer when taking out a guarantor home loan.

If you are interested in applying for a guarantor home loan, or are considering going guarantor we would be happy to answer any questions you may have about the process.

About the Author

Matthew Kenworthy is a specialist in all aspects of Residential & Commercial Finance. He can assist all borrowers from First Home Buyers to Property Investors with Large Portfolios.