There are two things you need to know about guarantors. The first is using a guarantor can help you get a loan that covers the full cost of buying a property – even more, in some cases – and you don’t even need to have a deposit. That means having a guarantor can get you into home ownership sooner.
The other thing to know is anyone prepared to be guarantor for you (or anyone, for that matter) is someone very special. In effect, they’re saying they will vouch for you in the most material way possible – by taking responsibility for the biggest debt you’re likely to have if you get into difficulties.
They aren’t just making a promise – they are taking an oath that’s legally binding.
What is a guarantor loan?
To help you gain a home loan, even without even a deposit, a guarantor offers their own property (or properties) as security. This guarantor, who is usually an immediate family member, may also contribute additional income to help you pay off the loan.
A guarantor becomes legally obliged to service payments on your loan should you become unable to do so.
Borrowers can remove the guarantees from their loan once they have paid off a certain amount. This will vary depending on the lender, with some even allowing borrowers to place limits on how big their guarantees are.
The key benefits of guarantor loans
Guarantor home loans offer you several benefits beyond not needing a deposit:
- You avoid paying Lenders Mortgage Insurance (LMI). This can save thousands of dollars.
- You can limit the guarantee so the guarantor faces less risk.
- Some lenders offer lower interest rates on loans with a guarantor.
- Some guarantor loans allow you to consolidate smaller debts into the loan.
How much can I borrow?
This depends on several factors, including the type of loan and the size of the guarantee.
- First-time buyers can often get loans of 105% of their home’s value.
- Those looking to build their own homes can borrow 105% of the combined construction and land costs.
- Some investors, usually first-timers, can get a 105% loan. Very few lenders, however, offer guarantor loans to investors. Those investing in several properties usually can’t access guarantor loans at all.
- Borrowers who want to refinance their homes can get a loan of 100% of the property’s value.
Borrowers can consolidate existing debts into their guarantor loans. This means you may end up borrowing up to 110% of your home’s value. Lenders won’t consider consolidation for borrowers with debts that are more than 10% of the property’s value.
Do I need savings to get a guarantor home loan?
In the end, you need to service the loan. Lenders want to know that you can put money aside to do this. That why most will want those applying for guarantor loans to have 5% of the home’s value in genuine savings.
The good news is that you don’t have to use these savings for the loan. Lenders might consider previous rent payments as proof that you can service the debt.
Some lenders have credit rating systems that decline some guarantor loans, even for those who have been saving regularly. This is usually because the borrower has few assets, which may class them as high risk.
Types of guarantees
Several options are available for guarantor home loans:
- Security guarantees: This is the most common type of guarantee and is where your guarantor secures the loan against a property (or properties). If there is a loan against the property, a lender may accept a second mortgage as a guarantee. A common term for this type of guarantor is “equity guarantor”.
- Limited guarantees: These ensure guarantors don’t accept liability for the full loan. In these situations, the lender and borrowers work together to establish a limit for how much the guarantor would be responsible for in case of a default.
- Security and income guarantees: Where the lender requires the guarantor to provide a loan security and proof of income. This is because the guarantor will use their income to pay for the loan, at least for a while. First-time buyers with low incomes commonly use this guarantee.
All of these are what lenders call “family guarantees”. It’s rare that guarantors are not family members.
Guarantor home loan structures and limits
Lenders take two securities against the loan. These are usually the purchased property and the security the guarantor places on the loan. In the case of parents, this might be the family home.
Lenders may limit the level of security that guarantors offer, limiting their liability.
Lenders may refuse to offer guarantor loans to those who have previously owned homes. In these cases, they could argue that a borrower should have enough to finance their own deposits for new homes. This may cause an issue for those who have left their property due to a situation beyond their control, such as a divorce settlement.
Talk to one of our experts to discuss your options.
The risks of being a guarantor
These loans come with risks, of course, but lenders tend to work with borrowers and guarantors to find solutions to problems. They will avoid selling the home in anything but extreme circumstances.
For example, let’s say you lose your job. Most lenders will prefer to wait things out rather than sell your home. In many cases, they may offer you a lower home loan rate until you get back on your feet.
Guarantors have several other protections. For one, a bank will sell the borrower’s property first, should a security need selling. This may occur if the borrower fails to make loan payments for between 90 and 180 days. In some cases, this will prevent the guarantor from having to pay any of the loan.
Limited guarantees offer more protection. This is especially important if the sale of the borrower’s house doesn’t cover the loan. In such cases, the guarantor only needs to cover the loan up to the limit.
A guarantor could take a second mortgage or personal loan to cover their costs. It is only when guarantors exhaust all other options that lenders sell the house used as a guarantee. Even then, the lender only takes the amount needed to cover the debt. The rest goes to the guarantor.
Should you be a guarantor?
It’s crucial that you talk to an independent expert before choosing to be a guarantor. In some cases, you can secure a parent-assisted home loan instead. This will let you help your child without taking on as much risk.
In all cases, you should ask yourself three questions before becoming a guarantor:
- Can I trust the person I’m guaranteeing?
- Can I cover the cost if something goes wrong?
- What payment conditions do I face? (This may require input from your lender.)
Guarantor home loans: frequently asked questions
When can I remove the guarantee?
Most borrowers don’t want a guarantor on their home loans for the entire loan period. Lenders will usually remove a guarantor once you have met certain conditions. They will want to see that you can meet your payments comfortably. This usually means getting no assistance while making all of your payments for at least six months. Most will not remove the guarantee until you have paid between 10% and 20% of the home’s value. In most cases, this takes between two and five years. You also need to take property depreciation into account. If you remove the guarantee before paying off 20% of the property’s value, you may have to pay LMI.
Can I get a guarantor loan if my parents have retired?
Most lenders won’t provide guarantor loans if your nominated guarantor is no longer working. Those that do will require the guarantor speak to a legal professional before agreeing to the loan.
Can I get a guarantor loan if my parents have a home loan?
Yes, as long as your parent has equity and is willing to take out a second mortgage. In such cases, lenders use several calculations to figure out if the guarantor is eligible. Lenders will find the current value of the guarantor’s home loan. They then combine this figure with the limited guarantee for the guarantor loan. If the combined figure is less than 80% of the value of the guarantor’s home, the lender may accept the guarantee. This is not the case for all lenders. You should talk to an expert to find out more.
What if the guarantor needs a second mortgage?
You shouldn’t complete a loan application until the guarantor has confirmed he or she can get a second mortgage. The lender also needs to complete a valuation of the guarantor’s property. Finally, the guarantor needs formal approval from the lender. With all of that in place, you can move forward with your application.
Why don’t banks charge LMI on guarantor loans?
It comes down to the security. Lenders will charge LMI on loans that are more than 80% of a property’s value. This is because the lender stands to lose money if the borrower defaults. A guarantor mostly eliminates this risk. Lenders will see the guarantee as equivalent to the LMI payment. Thus, the lender waives the LMI.
Can I consolidate debt into a guarantor loan?
Some lenders allow you to pull your current debts into a guarantor loan. Bear in mind that lenders have their limits. As a rule, you can’t consolidate debt that is more than 5-10% of your home’s value.
What is an 80/20 guarantor loan?
This is a way of getting a low doc loan with a guarantor. Lenders don’t tend to allow guarantors on low doc loans. However, you could have a guarantor take out a loan of 20% on your property. You will cover the other 80%. The guarantor then gives you the 20% loan to use as a deposit. Please note this is a risky method and you should seek independent advice before going down this path. Even then, very few lenders will allow you to do it.
Can I get a 100% guarantor loan for construction?
You can as long as you’re careful. You will need to apply for your construction and land loans at the same time. This is because lenders won’t increase a guarantor loan.
What to do next
You should talk to an expert to learn more about guarantor loans, prepare an exit strategy and help you understand the terms attached to the loan.
You can also read about how uno helped a first-home buyer purchase a home loan with the help of his mum, Christine.