What is a guarantor home loan?
A guarantor home loan is one that’s partially secured by a parent or other family member who offers up their own home equity in addition to your cash deposit. For the guarantor, their equity is the value of their home minus how much they owe on it. Some lenders call it a family security guarantee or family pledge home loan.
Using a guarantor can help cover a portion of your loan amount, typically enough to lower your loan-to-value ratio (LVR) to 80%, and avoid lender’s mortgage insurance (LMI). This means you don't need to save a 20% home deposit. Sometimes, a guarantor can guarantee your entire mortgage, allowing you to get a home loan with no deposit.
Without a guarantor, most lenders require at least a 5% deposit, which is an LVR of at least 95%. In that case, you’d have to pay LMI unless you apply via the government’s Home Guarantee Scheme for low-deposit borrowers, which has limited availability.
There’s more scrutiny with guarantor loans
Mansour Soltani , Home Loans Expert
“First, your guarantor must show they can service the portion of the loan they’re guaranteeing. Lenders will perform a detailed financial assessment of both the guarantor and borrower. You’ll both need to show three months of clean bank statements showing no late fees or overdraws. I've seen guarantor home loan applications rejected for something as small as a $10 late fee."
Mansour Soltani , Home Loans Expert
How does a guarantor home loan work?
Your guarantor must be a homeowner with enough usable equity (equity they can borrow against) to secure part or all of your home loan. Your guarantor doesn't need to provide any cash payment, and no actual money is exchanged as part of the guarantee. Instead, the guarantee relies on the value of their property to support your loan.
You’ll still need to borrow money from a lender, and the application process for a guarantor loan will take longer than a standard home loan. This is because both you and your guarantor will need to submit a complete set of documents (e.g. proof of income, bank statements) and undergo serviceability and credit checks.
One important detail to note is that your home loan will be secured by two properties (yours and the guarantor’s) instead of one. This means your guarantor loan application will require two property valuations.
Other aspects of the loan will be no different to a standard mortgage. You should still compare home loan rates and fees to ensure you're getting a good deal.
A guarantor home loan can be structured in two ways
Single home loan
With your guarantor providing security. The guarantor is listed as a third party to the loan.
Two separate home loans
One that covers the majority of the property's value and is secured solely by the home you're buying, and a second mortgage that covers the remaining value (usually 20%), secured by your guarantor. Once you’ve paid off the second smaller loan, you can apply to remove the guarantee.
What happens if there's a default?
In the event of a default, your property could be sold as a first resort to recover the lender’s costs. If the property sale doesn’t cover the outstanding mortgage balance, the lender may seek the remaining amount from the guarantor.
Your guarantor can be released from their obligations once you’ve made enough repayments or accumulated enough equity in your property to cover the guaranteed portion of your home loan.
It’s important that both the borrower and guarantor understand the responsibilities and conditions of a guarantee agreement. Lenders usually require both parties to sign a declaration confirming they have obtained independent legal advice before finalising the home loan agreement.
Guarantor mortgage example
Here’s a simple scenario showing how a home loan with a guarantor works:
- Let’s say you want to buy a property worth $600,000.
- You’ve saved $30,000, which is 5% of the purchase price, but you need another 15% ($90,000) to avoid LMI.
- Your parents own a home valued at $800,000 and have enough equity to guarantee the remaining $90,000.
- You can now borrow the money you need without putting any more money down or paying LMI.
- Over the next few years, you repay $90,000 of your loan principal and release your parents from the guarantorship.
How much can you borrow with a guarantor?
If you have a guarantor, you may be able to borrow the full loan amount (100% of the purchase price) without having to pay LMI. Some lenders will let you include additional costs, like conveyancing fees, into the loan, so you’d effectively borrow more than 100%.
However, most lenders will limit the guarantee to 20% of the property’s value to reduce the LVR to 80%.
How much you can borrow in dollar terms with a guarantor will depend on your income, expenses, liabilities, and your lender’s guarantor policy.
Your savings history will also be taken into account. Most lenders will still require you to show a certain amount of genuine savings, such as a 5% deposit, even if you have a guarantor. They will also check that you can service the full amount, irrespective of your guarantor’s contribution.
Showing savings is important even with a guarantor loan
Mansour Soltani , Home Loans Expert
“I had a client applying for a guarantor loan with a 50% LVR. Even though they passed the serviceability assessment, their loan was declined because they weren’t showing any savings. They were spending their entire salary by the end of the month. From a lender’s perspective, this type of spending behaviour suggests the borrower couldn't manage a mortgage effectively, regardless of having a guarantor.”
Mansour Soltani , Home Loans Expert
Guarantor home loan savings analysis
| Home buyer without a guarantor | Home buyer with a guarantor | |
|---|---|---|
Property price | $600,000 | $600,000 |
Deposit | 5% ($30,000) | 5% ($30,000) |
Loan amount | $570,000 | $570,000 |
Guarantor equity contribution | No guarantee | 15% ($90,000) |
LMI cost* | $26,305 (added to loan) | $0 |
Monthly repayments | $3,575.15 | $3,417.44 (save $158) |
Total interest payable | $690,749 | $660,278 (save $30,471) |
Total to repay | $1,287,054 | $1,230,278 (save $56,776) |
Pros & cons of guarantor home loans
Pros
- You can buy a home sooner with a smaller deposit or no deposit if you have a guarantor
- Avoid paying LMI if the guarantor guarantees up to 20% of your loan amount
- Having a guarantor may increase your chances of approval as it provides additional security for the loan
- With a guarantor, you might be able to borrow more than you could on your own (increasing your borrowing capacity)
Cons
- The guarantor is financially liable if you’re unable to make repayments
- Some of the guarantor’s equity is tied up in your property, limiting their options to sell or refinance
- A guarantor can access information about your loan and financial situation, which may result in reduced privacy
- Mixing family and finances could strain relationships
Guarantor loan requirements Australia: Who can be a guarantor?
Most lenders accept parents or immediate family as guarantors, including partners, siblings, some grandparents and children (aged over 18). Lenders have different eligibility criteria, but the following generally apply:
- A guarantor must be over 18 and typically under 65
- They must be Australian citizen or permanent resident
- They must own a home with sufficient usable equity to provide as guarantee
- They must have a good credit score and supply supporting financial documents
- They must meet the lender’s minimum income requirements
According to major bank ANZ, lenders tend to prefer guarantors who can use equity in a property they own as the guarantee. The other option is a serviceability guarantor who pledges some of their income. This is considered riskier from a lender’s perspective and is rarely accepted.
How to apply for a guarantor home loan
Applying for a guarantor home loan involves additional paperwork and steps compared to a standard home loan application.
1
Check your eligibility
Lenders generally have similar eligibility requirements for guarantor loans, including proof of income (showing you can service the full loan amount), a good credit score, and a guarantor with enough usable equity to secure part or all of your loan.
2
Submit your guarantor loan application
You can apply for a guarantor loan directly with your lender or via a broker who will handle the entire process on your behalf. You’ll be asked to provide some basic information, such as your budget for a property, deposit (if any), employment history, and any existing debts you may have.
3
Provide your documents
You and your guarantor will need to provide a full set of income documentation (e.g. payslips, tax returns), proof of identification, bank statements detailing living expenses and liabilities, and a record of your assets.
Additionally, your guarantor will need to provide a signed guarantor agreement, a copy of their mortgage documents and possibly proof of independent legal advice (depending on the lender's requirements).
4
Get pre-approval
The lender will assess your borrowing capacity based on both your financial situation and that of your guarantor (e.g how much usable equity they have). After the assessment, you may receive home loan pre-approval, which gives you more credibility as a serious buyer.
5
The lender will conduct a credit check
Your lender will review both your credit file and that of your guarantor through an external bureau, like Equifax or Experian. They will typically check your repayment history, credit limits, and any issues on your credit report. Your lender should get your permission before conducting a formal ‘hard’ credit check.
6
There will be two property valuations
Since a guarantor mortgage is secured by both your property and the guarantor’s, the lender will need to carry out two property valuations. They will assess the value of both properties to determine how much your guarantor can cover for your loan and your LVR.
7
Get unconditional approval & a loan offer
If the property valuations meet the lender’s criteria, you may receive unconditional approval for the guarantor loan. The lender will then issue a formal loan offer outlining the terms and conditions, including your interest rate. Review the offer thoroughly with your conveyancer and sign it if you agree to the terms. Your guarantor will also receive a copy of some (not all) of the loan documents.
8
Check back in 1-2 years
Mansour suggests ordering another valuation after 1-2 years to see how much equity you’ve built up in your property and if it’s enough to release the guarantor from your home loan (you’ll need at least 20% equity). At the same time, you could refinance your home loan to a more competitive interest rate.
