Blog: What Is a Guarantor Home Loan and How Does It Work in Australia?
Buying your first home can be difficult when you've got the income to make the repayments, but haven't yet saved a large enough deposit.
One option some buyers consider is a guarantor home loan.
A guarantor home loan allows an eligible family member—often a parent—to use equity in their own property as additional security for part of your home loan.
This can potentially help you buy sooner and, depending on the loan structure, may help you avoid or reduce Lenders Mortgage Insurance (LMI). However, becoming a guarantor involves genuine financial and legal risk, so it's important that everyone involved understands exactly how the arrangement works.
What is a guarantor home loan?
A guarantor home loan is a home loan where another person provides additional security to support the borrower's application.
In many cases, the guarantor is a parent who has built up equity in their own home.
Rather than giving the borrower cash for a deposit, the guarantor may allow part of the equity in their property to be used as additional security for the loan.
The borrower still owns the property being purchased and is responsible for making the home loan repayments.
The guarantor is providing security and agrees to meet their obligations under the guarantee if the borrower cannot repay the loan.
How does a guarantor home loan work?
Let's look at a simplified example.
Suppose you're purchasing a property for $700,000.
You've saved $35,000, giving you a 5% deposit, but you don't have the 20% deposit commonly associated with avoiding LMI.
Depending on the lender and your circumstances, a family member may be able to use equity in their property to provide additional security for a portion of your loan.
Importantly, this doesn't necessarily mean your parents are handing you that money.
Their property is instead being used as additional security for the agreed portion of the lending.
The exact structure, maximum loan-to-value ratio and amount covered by the guarantee vary between lenders.
Who can be a guarantor for a home loan?
This depends on the lender.
Parents are common guarantors, but some lenders may accept other eligible family relationships.
For example, Westpac's current Family Security Guarantee can potentially accept a parent, legal guardian, sibling or adult child, subject to its eligibility requirements. Other lenders have their own policies.
This is one reason it's important not to assume that the policy of one bank represents every lender.
Do I need a deposit if I have a guarantor?
Not necessarily—but having a guarantor doesn't automatically mean you can buy a home with no savings.
The deposit and genuine-savings requirements vary between lenders and applications.
You'll also need to consider the other costs involved in purchasing a property, which may include stamp duty, conveyancing, inspections and other expenses.
Most importantly, a guarantor doesn't replace your need to demonstrate that you can afford the loan repayments.
Can a guarantor help me avoid LMI?
Potentially.
Lenders Mortgage Insurance is generally relevant when a lender considers a loan to have a higher loan-to-value ratio. Moneysmart notes that a 20% deposit generally avoids LMI, although other pathways can also allow eligible borrowers to buy with smaller deposits without paying it.
With a guarantor arrangement, the additional security may allow an eligible borrower to reduce or avoid LMI, depending on the lender and loan structure.
That can potentially represent a significant upfront saving.
However, avoiding LMI alone isn't a reason to use a guarantor. The risks and overall loan structure need to be considered as well.
Does a guarantor own part of my house?
Providing a guarantee is different from purchasing the property as a co-owner.
The guarantor provides security for the loan but doesn't automatically receive an ownership interest in the property simply because they have provided the guarantee.
The precise legal obligations will depend on the guarantee documents, which is one reason independent legal advice is so important.
Is the guarantor responsible for the entire home loan?
This depends on how the guarantee is structured.
Some guarantees can be limited to a particular amount rather than covering the borrower's entire debt. Moneysmart specifically recommends understanding whether a guarantee covers the whole loan or only part of it, as well as when that liability reduces or ends.
A limited guarantee can therefore be an important consideration when structuring the lending.
The guarantor should understand exactly how much they're guaranteeing before signing anything.
When can a guarantor be removed from a home loan?
A guarantor isn't necessarily attached to your home loan for its entire 30-year term.
Depending on the lender, you may be able to request that the guarantee be released once sufficient equity has been built up.
That could happen through:
Paying down the home loan
The property increasing in value
A combination of both
Refinancing or restructuring the lending
For example, Westpac states that release may generally be considered when repayments are satisfactory and the loan-to-value ratio has fallen to a level where LMI isn't required, subject to its requirements at the time.
There's no universal timeframe, so borrowers shouldn't assume the guarantor will automatically be released after a certain number of years.
What are the risks for the guarantor?
This is the part that shouldn't be glossed over.
Being a guarantor is a serious financial commitment.
If the borrower can't meet their obligations, the guarantor may become liable under the guarantee. Where the guarantor's home has been provided as security, that property can ultimately be at risk if the debt cannot be repaid.
Providing a guarantee can also affect the guarantor's own ability to borrow, and a default may affect their credit position.
Anyone considering becoming a guarantor should understand the guarantee documents and seek independent legal and financial advice before proceeding.
Guarantor home loan vs the Australian Government 5% Deposit Scheme
These aren't the same thing.
Under the Australian Government 5% Deposit Scheme, eligible buyers may be able to purchase with a smaller deposit without needing to pay LMI. A guarantor arrangement instead involves another person providing security to support the loan.
Depending on your circumstances, one option may make considerably more sense than the other.
That's why it's worth investigating the alternatives before assuming you need your parents to guarantee your home loan.
Frequently Asked Questions
What is a guarantor home loan?
A guarantor home loan involves another person—commonly a family member—providing additional security to support a borrower's home loan. The guarantor takes on financial responsibility under the terms of the guarantee if the borrower cannot meet their obligations.
Can my parents use their house as guarantor for my home loan?
Potentially. Some lenders allow eligible parents to use equity in their property as security for part of their child's home loan, subject to lending criteria.
Can I buy a house with no deposit if my parents go guarantor?
Some lending structures may allow very high loan-to-value ratios with guarantor support, but requirements vary significantly between lenders. A guarantor also doesn't remove the need to demonstrate that you can service the loan or account for purchasing costs.
Does being a guarantor affect my parents' borrowing capacity?
It can. A guarantee may be considered when a guarantor applies for lending of their own, potentially affecting how much they can borrow.
Can my parents be removed as guarantors later?
Potentially. Once the borrower's lending position meets the lender's requirements without the additional security, it may be possible to apply to release the guarantee.
Is a guarantor home loan the same as giving my child a deposit?
No. A guarantor generally provides security to support the lending rather than simply transferring cash to the borrower.
Is a guarantor home loan right for you?
A guarantor home loan can be a useful way for some buyers to enter the property market sooner, but it isn't the right solution for everyone.
The important part is understanding all of the options available before putting a family member's property behind your loan.
At Thrive Financial Group, we can look at your deposit, borrowing capacity and circumstances, compare lending options and help you understand whether a guarantor structure—or another first-home-buyer pathway—may be suitable.
