A guarantor home loan is a valuable option for Australians struggling to enter the property market due to limited savings. With housing affordability becoming a significant hurdle, many first-time buyers are turning to guarantor arrangements to secure finance without needing a large deposit.
This type of loan offers a practical solution: instead of saving the full 20% deposit, borrowers can rely on a family member’s support to provide equity as security. While the concept is simple, the implications are far-reaching for borrowers and guarantors.
Head over to our site for further insights and guidance.
How The Guarantor Loan Structure Works
Two-Part Loan Security
In most cases, the loan is split into two components:
- Primary Loan Portion – Secured by the property the borrower buys (typically up to 80% of its value).
- Secondary Secured Portion – Backed by the guarantor’s property, often covering the remaining 20%.
This structure reduces the lender’s risk and allows for higher borrowing limits. If the borrower defaults, the lender has access to the purchased property and, if necessary, a portion of the guarantor’s property.
No Out-Of-Pocket Guarantee
Unlike co-borrowing or gifting a deposit, the guarantor doesn’t provide cash. Their involvement is limited to using their equity to secure the loan. There are no direct financial transfers between the guarantor and the borrower.
Who Can Act As A Guarantor?
Preferred Relationship
Australian lenders generally require the guarantor to be an immediate family member—most commonly a parent. Depending on the lender, siblings and grandparents may also qualify.
This requirement is based on the assumption that close family members are more likely to understand the financial risks involved and be willing to support each other long-term.
Financial Conditions
To act as a guarantor, an individual must meet certain criteria:
- Own a property with sufficient available equity.
- Have a good credit history.
- Be financially stable.
- Understand the risks and be prepared to cover the guaranteed portion if needed.
Some lenders may reject guarantors with outstanding debts, poor credit ratings, or low equity in their property.
Benefits Of Guarantor Home Loans
Smaller Or No Deposit Needed
The biggest advantage is that the borrower can buy a home without saving a full deposit. This allows for faster access to the property market and helps beat rising house prices. A borrower can often secure a loan with as little as a 5% or even 0% deposit, depending on the lender’s assessment and the guarantor’s equity.
Avoid Lenders Mortgage Insurance (LMI)
Loans with deposits under 20% usually attract LMI, which can add thousands of dollars in upfront costs. A guarantor arrangement helps borrowers avoid this cost by providing the lender with additional security.
This saving can be redirected toward moving expenses, property upgrades, or emergency funds.
Boosted Borrowing Capacity
Some borrowers may qualify for a higher loan amount with a guarantor. This can open up more options in terms of location, property size, or features without needing to compromise due to financial limits.
Responsibilities Of The Borrower
Full Repayment Responsibility
Although the guarantor provides security, they are not expected to make repayments unless the borrower defaults. The borrower remains entirely responsible for timely loan repayments and maintaining financial stability.
If the borrower misses repayments or falls behind, the lender could take action, including involving the guarantor.
Building Equity Over Time
As the loan is repaid and the value of the borrower’s property increases, the loan-to-value ratio improves. Eventually, this can lead to the guarantor being released from the obligation, typically once the LVR falls below 80%.
At that point, the loan continues solely on the strength of the borrower’s property and repayment history.
Risks To The Guarantor
Financial Exposure
The most serious risk is financial liability. If the borrower fails to meet repayments and the lender cannot recover the full loan amount from the property sale, the guarantor is responsible for the shortfall, up to the value they guaranteed. This could involve making a lump sum payment or selling part of their property if necessary.
Impact On Borrowing Power
A guarantor loan may limit the guarantor’s ability to borrow in the future. The guarantee is recorded as a financial liability, which can reduce the guarantor’s borrowing capacity for personal loans, investment properties, or credit cards.
Potential Credit Impact
If the borrower defaults and the guarantor cannot cover the shortfall, this can damage the guarantor’s credit score and, in severe cases, lead to legal proceedings.
Releasing The Guarantor
When Can The Guarantor Be Removed?
The guarantor can be released from the loan once the borrower has built sufficient equity in their property. This typically occurs when:
- The loan balance is less than 80% of the property’s value.
- The borrower has demonstrated consistent and reliable repayments.
- A formal property valuation confirms sufficient equity.
The process involves submitting a request to the lender and supporting documents. The lender may require a full assessment, including a credit check and updated income verification.
Eligibility Criteria For Borrowers And Guarantors
Borrower Requirements
To qualify for a guarantor loan, the borrower must show:
- Stable employment and a reliable income.
- A strong repayment history on other loans or credit products.
- An ability to service the loan independently over time.
Lenders also look for financial discipline and savings habits, even if a full deposit isn’t available.
Guarantor Requirements
Lenders expect guarantors to have:
- Substantial equity in their property.
- No recent defaults or bankruptcies.
- Good financial understanding of what the role involves.
Some lenders will only accept a guarantor if they are also an Australian citizen or permanent resident.
Application Process
Step-By-Step Guide
- Initial Consultation
Discuss the option with a lender or mortgage broker to determine if a guarantor loan suits your situation. - Choose a Guarantor
Identify a willing and financially eligible family member. Both parties should understand the responsibilities involved. - Independent Legal and Financial Advice
Many lenders require the guarantor to seek independent advice to confirm they understand their obligations. - Submit the Loan Application
Provide all necessary documents, including proof of income, ID, and the guarantor’s property details. - Loan Approval and Signing
Once approved, both borrower and guarantor sign the loan documents and guarantee forms. - Settlement and Property Purchase
Funds are disbursed, and the purchase proceeds are used as security. The guarantor’s property is security until the borrower reaches sufficient equity.
Legal And Financial Guidance
Importance Of Professional Advice
Lenders almost always require guarantors to obtain independent legal and financial advice before finalising the loan. This step helps protect all parties by ensuring a full understanding of:
- The financial risk
- The impact on credit and borrowing ability
- The process to release the guarantee in the future
This advice should be documented and submitted to the lender as part of the loan process.
Conclusion
A guarantor home loan allows buyers to enter the property market with little or no deposit by using a family member’s property as security. While this provides significant advantages, such as avoiding LMI and increasing borrowing capacity, it also introduces serious financial risks for the guarantor.
Understanding all responsibilities, seeking professional advice, and ensuring financial readiness are essential before committing to such an arrangement.
Frequently Asked Questions
Can A Guarantor Be Removed From A Home Loan?
Yes, a guarantor can be removed once the borrower has built enough equity in the property, usually when the loan-to-value ratio (LVR) drops below 80%. This typically requires a formal request to the lender, a property valuation, and an updated financial assessment. If approved, the guarantor is released from any further obligation.
What Happens If The Borrower Defaults On A Guarantor Loan?
If the borrower fails to meet repayments and the loan defaults, the lender may seek repayment from the guarantor for the guaranteed portion. This can impact the guarantor’s credit rating and, in extreme cases, lead to the sale of their property. The lender will usually exhaust all options with the borrower before involving the guarantor.
Does Being A Guarantor Affect My Ability To Get A Loan?
Lenders consider acting as a guarantor a financial liability, which may reduce your borrowing capacity. Even though you are not making repayments, the potential risk is factored into any future loan applications. It’s important to disclose any guarantees when applying for credit yourself.