Written by If you’re struggling to secure a home loan, a guarantor home loan could be the solution you're looking for. With this type of loan, someone close to the borrower, usually a family member, agrees to take financial responsibility for part or all of the loan if the borrower defaults. This provides an extra layer of protection for lenders, helping to reduce the level of risk involved and allowing borrowers to secure a loan they might not otherwise qualify for.
When do you need a guarantor home loan?
There are three common situations where you may need a guarantor when you apply for a home loan:
1) If you have a low deposit for your home.
The home loan approval criteria of different lender’s varies. However, if you have less than 20% deposit, you may be asked to provide a guarantor. The less deposit you have, the more risk there is for the lender.
A 20% deposit can be a hefty sum. The table below shows what it can be for a range of home values.
| Home value | 20% deposit |
|---|---|
|
$400,000 |
$80,000 |
|
$500,000 |
$100,000 |
|
$600,000 |
$120,000 |
|
$700,000 |
$140,000 |
2) If you have a poor credit score.
When you apply for any loan, the lender will check your credit score. This score is compiled by credit reporting agencies in Australia.
You’ll have a poor credit score if you have failed to repay any loans or credit on time. Your lender will perceive you as a credit risk.
3) If you have no credit score.
If you have never had any loans or credit, you’ll have no credit score. For example, if you’re young and you’ve never borrowed before or had any phone or electricity accounts in your name.
How does a guarantor home loan work?
The home loan guarantor will usually provide extra security to the lender by providing one of the following.
1) An income guarantee
The guarantor satisfies the lender that they have the income and financial position to afford the borrower’s repayments.
You can use our calculator to work out repayments on different loan amounts with different interest rates and terms.
2) Collateral security
Collateral security is a financial term. It involves offering assets as lender security for approving a loan.
If the borrower fails to make repayments, the lender can legally repossess the guarantor’s collateral security asset. The lender can then sell the asset to recoup any amount owing on the home loan.
The preferred collateral security on a guarantor home loan is property. Guarantors therefore need to own their home or have enough equity in it to satisfy the lender’s collateral security requirements.
Each of these two guarantees (income and collateral security) reduces the lender’s risk on a guarantor home loan.
Note that there is no cash required upfront with such an arrangement and payment is only required if the borrower fails to repay their loan. If the borrower does default, the lender will attempt to recover the debt from the borrower’s assets. However, they are only liable for the portion of the loan they have guaranteed. This means that, for example, if a guarantor guarantees 20% of a $500,000 loan, they would be responsible for a maximum of $100,000 if the borrower defaults.
Who can be a guarantor on a home loan?
A guarantor is typically a close family member such as a parent, sibling or grandparent who agrees to take on financial responsibility for part or all of your home loan if you default. To be eligible, a guarantor must meet certain criteria:
- Age: they must be 18 years or older. Some lenders may have a maximum age limit, often around 65.
- Citizenship or residency: they must be an Australian citizen or permanent resident.
- Credit rating: they must have a good credit history.
- Property ownership: they must own property with equity, which can be used as security for the loan.
- Income: they should have a stable income to demonstrate their ability to meet financial obligations.
While family members are the most common guarantors, it's also possible to have a non-personal guarantor. This could be a non-trading company or a trust, though the requirements and process for such guarantors can be more complex.
Before agreeing to be a guarantor, it's crucial to carefully consider the potential risks and responsibilities involved, such as the financial consequences, the danger of losing your own property if the borrower fails to meet their obligations and any legal implications that could arise.
Do guarantor home loans cost more?
Not necessarily.
Many guarantor home loans have the same rates as standard home loans because the lender’s risk is the same. A suitable guarantor lowers the lender’s risk.
A guarantor home loan could in some cases be cheaper because it can avoid the need for lenders mortgage insurance (LMI). Lenders will usually require a borrower who has less than 20% deposit and no guarantor to pay for LMI. However, the income guarantee or collateral security provided by a guarantor can make LMI unnecessary.
Home loan interest rates vary between lenders, so it’s important to do your market research. If you don’t have time, you can get a licensed mortgage broker to do it for you.
How long does a guarantor arrangement need to last?
The guarantor home loan arrangement only needs to last until the borrower satisfies the lender’s standard home loan criteria. For example, until the borrower:
Sufficiently lowers their loan-to-value ratio (LVR).
The LVR is the amount owing expressed as a percentage of the home’s value. For example, if there is $600,000 owing and a home is worth $700,000, the LVR is 85.7%. This figure is calculated by dividing $600,000 by $700,000 and multiplying by 100 to convert the ratio to a percentage.
Borrowers can reduce their LVR over time in two ways:
1) by making loan repayments.
2) via their home increasing in value.
Most lenders will be prepared to convert a guarantor home loan to a standard home loan once the LVR falls below 80%.
Develops a good credit score.
Borrowers can develop a good credit score by making all their debt and credit repayments on time. They can also improve it by not applying for any more loans or credit.
The removal of your guarantor from the mortgage is not an automatic process and will require you to refinance your home loan. This involves applying for a new loan without a guarantor. If approved, the new loan replaces the old one, releasing the guarantor from their obligation and allowing you to take on the repayments independently.
What are some alternatives to using a guarantor on my home loan?
While a guarantor can be helpful for securing a home loan, it might not be an option in all situations. Here are some other strategies to consider if your savings fall short or your credit history isn’t up to par:
Parent assist home loan: this allows parents to contribute to your deposit using cash or equity in their home, much like a gifted deposit. Unlike a guarantor, they aren't liable for your loan repayments. However, you'll have a separate legal agreement to repay them.
First Home Owner's Grant (FHOG): this government grant can significantly reduce your upfront costs, though eligibility and grant amounts vary by state/territory. You can also use the FHOG in conjunction with other strategies like a low-deposit loan.
Low-deposit home loan: many lenders offer the option to get on the housing ladder with a lower deposit amount. However, be aware that while you can secure a loan with a smaller deposit below 20%, you'll likely need to pay LMI.
Family Home Guarantee: the Family Home Guarantee is a government initiative designed to help eligible single parents or single legal guardians purchase a home with a smaller deposit. This scheme allows eligible buyers to purchase a home with as little as a 2% deposit, avoiding the need for LMI.
Cheaper property: consider looking at smaller properties or those in different locations or requiring renovations.
The best alternative depends on your individual circumstances. Consider:
- Your financial situation: how much can you save for a deposit?
- Government program eligibility: do you meet the criteria for programs like FHOG or Family Home Guarantee?
- Long-term affordability: can you comfortably afford monthly repayments with or without LMI?
- Willingness to compromise: are you open to buying a less expensive property or co-owning?
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Pros and cons of using home loan guarantor
Improved loan approval chances
A guarantor provides added security and reassurance, which can turn a potential rejection into an approval.
Better loan terms
Having a guarantor reduces lender risk, potentially qualifying the borrower for lower interest rates and reduced fees.
Enter the property market sooner
A guarantor helps buyers meet lending criteria faster, avoiding delays as property prices climb.
Higher borrowing power
Borrowers may be able to access larger loans, givingthem more choice and the chance to purchase the property they want.
Avoid LMI without a full deposit
Borrowers who lack a 20% deposit can use a guarantor to meet the requirement, eliminating the need for costly LMI.
Strain on relationships
If financial difficulties arise, the guarantor might be forced to repay the loan or lose assets, potentially damaging family or personal relationships.
Limits on guarantor’s borrowing power
The guarantor’s liability is factored into their own creditworthiness, restricting their ability to take out loans or credit until the guarantee is lifted.
Risk to guarantor’s credit score
Missed payments on the mortgage can damage the guarantor’s credit score, impacting their future borrowing capacity.
Not every lender will help
Not all lenders provide guarantor home loans, as these arrangements involve additional risk and administrative processes.
Top tips to consider before entering a guarantor home loan
More questions about guarantor home loans
A guarantor and a co-borrower play very different roles in a home loan agreement. A co-borrower is a joint applicant for the loan, equally responsible for repayments and typically co-owns the purchased property. In contrast, a guarantor provides financial backing without being involved in regular repayments or ownership. The guarantor steps in only if the borrower defaults, offering additional security to the lender. This distinction affects not only the legal responsibilities but also the risks and benefits associated with each role.
No, the guarantor's home loan does not necessarily have to be with the same lender as the borrower’s loan, though this can make it easier and some lenders do require it. Either way, the guarantor must provide equity or collateral that meets the new lender's requirements. In cases where the guarantor’s property is tied to a different lender, a detailed assessment and approval process will be required to allow the use of that equity as security. This may involve additional steps, such as refinancing or providing a legal guarantee, depending on the lender's policies.
Yes – guarantors can be used for investment property loans, though eligibility and conditions may vary between lenders. A guarantor provides additional security by offering equity from their property, reducing the lender's risk. This arrangement can enable borrowers to access higher loan amounts or avoid paying LMI. However, both parties should consider the increased risks associated with investment properties, such as potential market fluctuations or rental income shortfalls, before proceeding.
A guarantor’s credit score remains unaffected as long as the borrower meets their repayment obligations. However, if the borrower defaults and the guarantor becomes liable for the debt, any delays or defaults in meeting these repayments could negatively impact the guarantor's credit rating. Before agreeing, guarantors should carefully evaluate the potential risks and ensure they have a financial plan to mitigate any adverse effects.
If a guarantor decides to sell their property, they must ensure the guaranteed portion of the borrower’s loan is resolved beforehand. This typically involves the borrower refinancing to release the guarantor or reducing the loan balance to a point where the guarantor is no longer needed. If the guarantor owns multiple properties, they may be able to transfer the security to another asset, subject to lender approval. Selling without resolving the guarantee could lead to legal and financial complications.
Technically yes, but lenders won’t usually take any formal action until a home loan borrower is at least 90 days in arrears. They will also usually take against the borrower first before the guarantor. For example, repossessing the borrower’s property to recoup the debt. In that situation, the guarantor will only be responsible for any shortfall.
No – loan approval is not guaranteed even with a guarantor. While having a guarantor can significantly enhance a borrower's application by providing additional security, lenders still assess the primary applicant's financial situation, credit history and repayment capacity. The guarantor's role reduces the lender's risk, but approval depends on both the borrower meeting certain criteria and the guarantor's financial standing.
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