What Is A Guarantor Home Loan?

A Guide To Guarantor Mortgages: Their Benefits & Risks

Saving a 20% deposit can feel like trying to sprint through wet cement, especially while rents, groceries and life generally keep happening. That’s where mortgages with a guarantor (also called guarantor mortgages or loans with a guarantor) can be a genuine shortcut for eligible buyers.

A guarantor home loan can help you buy sooner, give you access better lending conditions, such as a higher loan-to-value ratio and enable you to potentially avoid Lenders Mortgage Insurance (LMI). But it also comes with serious responsibilities for the guarantor, so it needs to be done with clear boundaries and a plan to remove the guarantee later.

So what exactly is a guarantor mortgage loan and how does it work for all parties?

What is a guarantor home loan?

A guarantor home loan is a mortgage where another person agrees to provide extra security for your loan. That person is the mortgage loan guarantor. In most cases, it is a close family member such as a parent, grandparent or sibling.

Instead of giving you money, the guarantor offers part of the equity in their property (or sometimes funds in a term deposit) as security for part of your loan. This can help you:

• Buy with a smaller deposit, or sometimes no deposit

• Potentially avoid paying LMI

• Improve your chances of approval (depending on your circumstances)

A key point: you are still responsible for the loan repayments. The guarantor is not there to make repayments for you day to day.

Importantly, a guarantor is not “giving you money”. No cash needs to change hands. The guarantor is providing security that reduces the lender’s risk.

You’ll most commonly see this structured as a limited guarantee, where the guarantor only guarantees a set amount or portion of the loan (rather than the full loan).

How Does A Guarantor Mortgage Work?

With loans with a guarantor, the lender takes security over:

• The property you are buying, and

• A portion of the guarantor’s property (or other acceptable security)

The guarantee is often “limited”, meaning the guarantor is only responsible for a set portion of the loan (not the full loan). This portion is commonly the amount above an 80% loan-to-value ratio (LVR). Here’s the simple version of how a guarantor arrangement works in practice:

1. You apply for a home loan (as the borrower) based on your income and capacity to repay.

2. The lender assesses your deposit and overall loan-to-value ratio (LVR).

3. If your deposit is small, the lender may require extra comfort. Your guarantor offers security using equity in their property or other acceptable security.

4. The lender sets the guarantee amount so the effective LVR is reduced (often to 80% or below).

5. You make repayments as normal. The guarantor does not make repayments unless you default and the lender calls on the guarantee.

6. Release of Guarantor: Once the borrower has paid off enough of the loan, typically reducing the loan-to-value ratio to 80% or lower, the guarantor can apply to be released from the obligation.

What a typical guarantor loan structure can look like

If you are buying with a small deposit and the lender would normally charge LMI, a guarantor may be used to reduce the lender’s risk position.

For example, if you need to borrow 95% of the purchase price, the guarantor may guarantee part of the loan so the lender’s exposure is effectively reduced closer to 80%. This can be a pathway to avoiding LMI, depending on the lender and structure.

What happens if repayments are missed?

You remain solely responsible for making repayments. If you fall behind and the lender cannot recover the shortfall from you, the lender can call on the guarantee up to the guaranteed amount. This is why guarantor loans should always be set up with clear boundaries and a plan to remove the guarantor later.

Do You Need A Deposit If You Have A Guarantor?

One of the biggest advantages of mortgages with a guarantor is the potential to buy a home with little to no deposit. This is particularly beneficial for first-time buyers who may struggle to save the typical 20% deposit required by most lenders. However, the exact need for a deposit depends on a few factors:

1. No Deposit Required: In many cases, having a guarantor means you can borrow up to 100% of the property value, eliminating the need for a deposit entirely. The guarantor's property or savings act as additional security, allowing the lender to overlook the lack of a deposit.
   

2. Reduced Deposit: Some lenders may still prefer the borrower to contribute a small deposit, even with a guarantor. This shows the borrower’s commitment and reduces the overall risk. The required amount is often much lower, such as 5% of the property value, compared to the standard 20%.

However, it is important to understand the difference between “deposit” and “upfront costs". Take a read of our recent blog about the costs of buying a house.

You will still need savings for upfront costs

Even if your deposit is reduced, you should still budget for costs such as:

• Transfer duty (stamp duty), if applicable

• Conveyancing and legal fees

• Building and pest inspections

• Loan establishment and settlement fees (if applicable)

• Moving costs

• A buffer for the first 3 to 6 months of home ownership

Most lenders also want to see that you can manage your finances responsibly. Even when a guarantor is involved, your income, debts, living expenses and credit history still matter. Lenders will still assess the borrower’s creditworthiness, income stability and ability to repay the loan. A guarantor doesn’t replace these requirements but rather complements them, offering an extra layer of security for the lender.

Key Takeaway

If you have a guarantor, you may not need a deposit to secure a home loan. However, it’s always wise to have some savings available to cover other upfront costs and demonstrate financial responsibility. A guarantor home loan offers a pathway to homeownership sooner, but it’s essential to understand all the financial commitments involved for both you and your guarantor.

Who can be a guarantor?

The most common guarantor is an immediate family member. Depending on the lender, this may include:

• Parents

• Stepparents

• Grandparents

• Siblings

• Sometimes parents-in-law or legal guardians (policy varies)

In most cases the guarantor must:

• Own a property in Australia with enough usable equity

• Have a stable financial position

• Understand the risks and responsibilities involved

Some lenders strongly encourage (or require) the guarantor to obtain independent legal advice before signing.

Guarantor Loan Requirements In Australia

Every lender has its own policy, but these are common requirements to secure a guarantor mortgage for both the borrower and the guarantor:

Borrower Requirements:

You will usually need to:

• Meet standard lending criteria (income, employment, expenses and credit history)

• Show you can service the loan on your own

• Provide the usual documents (payslips, bank statements, identification, liabilities)

• Buy an acceptable property type in an acceptable location (as per lender policy)

Guarantor Requirements:

A guarantor will generally need to:

• Provide evidence of ownership and mortgage details for their property

• Have sufficient equity to support the guaranteed portion

• Be comfortable that their property is being used as security

• Sign legal documents confirming the guarantee

How Long Does A Guarantor Stay On A Mortgage?

There is no fixed timeframe. In many cases, a guarantor stays on the mortgage until the borrower’s loan-to-value ratio reduces to 80% or below, or until the lender is otherwise satisfied that the loan no longer needs additional security.

How quickly that happens depends on:

• How fast you repay the loan

• Whether you make extra repayments

• Whether the property value increases

• Whether you refinance and restructure the loan

A common goal is to remove the guarantor as early as practical, once it is financially sensible and the lender’s requirements are met.

How do you remove a guarantor from a home loan?

Removing a guarantor typically involves:

1. A property valuation (to confirm current value)

2. A review of the loan balance to confirm the LVR is within the lender’s threshold

3. The borrower meeting servicing requirements (the lender reassesses affordability)

4. Paperwork to formally release the guarantee (and sometimes fees)

It is not usually automatic. You generally need to apply to your lender and the lender must approve the release.

Pros and cons of guarantor mortgages

Benefits

Having a family member act as a guarantor can be incredibly beneficial for aspiring homeowners. It can enable you to:

• Buy sooner with a smaller deposit

• Potentially avoid LMI

• Have more flexibility if you have strong income but limited savings

• Have a clear pathway to full ownership without the guarantor long term

• Get faster loan approval: lenders are often more willing to approve loans with guarantors, leading to quicker approval times.

Risks

You do need to be aware of the risks of entering this arrangement which include:

• The guarantor’s property is used as security

• The guarantor’s borrowing flexibility may be reduced

• Family pressure if expectations are unclear

• Removal requires lender approval and sufficient equity

FAQs: Guarantor Home Loans

What is a guarantor home loan?

A guarantor home loan is a mortgage where another person provides additional security for your loan, usually using equity in their own property. This can help you buy with a smaller deposit and may reduce or avoid LMI.

How does a guarantor work?

The guarantor agrees to secure part of the loan. You are responsible for repayments, but if you default and the lender suffers a loss, the lender may call on the guarantee up to the guaranteed amount.

Who can be a guarantor?

Most lenders prefer a close family member such as a parent, stepparent, grandparent or sometimes a sibling. The guarantor usually needs to own property with enough usable equity and meet lender requirements.

How long does a guarantor stay on a mortgage?

A guarantor usually stays on until the borrower has enough equity to meet the lender’s requirements to remove the guarantee, commonly once the loan-to-value ratio is 80% or below.

How do you qualify for a guarantor home loan?

You must meet standard lending criteria and show you can repay the loan on your own. The guarantor must have sufficient usable equity and an acceptable property to support the guarantee.

What is the financial impact of a guarantor home loan?

For the borrower, it can reduce or avoid LMI and help you buy sooner. For the guarantor, it can reduce borrowing flexibility and creates liability for the guaranteed portion if the borrower defaults.

Is a Guarantor Home Loan Right for You?

A guarantor home loan can be an excellent solution for those struggling with a deposit or seeking to avoid LMI costs. However, it’s important to understand the responsibilities and potential risks involved for both parties. Before proceeding, speak with a financial advisor or mortgage broker to assess your situation and determine if a guarantor mortgage is the right fit.

How CJG Finance can help

Guarantor loans are all about getting the structure right. Different lenders treat guarantor mortgages differently, including how much can be guaranteed and when a guarantor can be released.

CJG Finance can help by:

• Assessing whether a guarantor loan makes sense for your situation

• Recommending a limited guarantee structure to reduce risk

• Comparing lenders and policies for mortgages with a guarantor

• Managing the paperwork, timelines and lender requirements

• Creating an exit plan so the guarantor can be removed as soon as practical

If you are considering a guarantor home loan, contact CJG Finance today or call Colin on 0402 413 917 or email him: cgreen@cjgfinance.com.au

The information contained in this post is for general guidance only and does not constitute personal advice. It's important to do your own research as regulations, fees and charges change over time.