Saving for a deposit is the largest obstacle for many Australians purchasing their first house. Entering the market can seem unattainable due to escalating real estate costs and lenders' frequent 20% deposit requirements. A guarantor house loan might be quite helpful in this situation.
Understanding Guarantor Home Loans
A close relative can utilize the equity in their house to secure all or a portion of your home loan if they are a guarantor. This implies that you might be able to avoid lenders' mortgage insurance (LMI) and not require a sizable deposit. The guarantee typically only covers a percentage of the loan, often 20%, and not the entire amount.
First-time homebuyers who have steady salaries but insufficient savings for a conventional deposit are most likely to choose this arrangement.
How It Works
A limited guarantee backed by the guarantor's property is provided. This does not imply that you are receiving payment. It implies that in the event that you are unable to make loan payments, they will be held accountable. Up to the guaranteed sum, the lender may demand repayment from the guarantor in the event of the borrower's default.
After a few years of regular repayments, certain lenders might permit the guarantee to be lifted, particularly if the loan-to-value ratio (LVR) falls below 80%. You can use tools like the Servicing Calculator to assess how much you may be able to borrow with or without a guarantor.
Benefits for First Home Buyers
Reduced Deposit Requirements
If you have a guarantor, you can borrow up to 100% of the property value. This eliminates the requirement for a sizable deposit. It also means you don't have to wait years to save money, so you can move more quickly in a competitive market.
Avoiding Lenders Mortgage Insurance (LMI)
LMI is typically assessed by lenders if your deposit is less than 20%. This expense, which frequently exceeds thousands, can be avoided with the aid of a guarantor loan. For instance, with a 10% deposit, the LMI on a $600,000 house might be more than $15,000.
Increased Borrowing Capacity
You might be able to purchase a property with more features or in a better location if your guarantor's equity can support a larger loan amount. For instance, an individual may only be eligible for a $450,000 loan on their own if they have a $50,000 deposit. They could be able to borrow more than $600,000 with a guarantor, contingent on their income and the lender's requirements.
Risks and Considerations
Guarantor's Financial Liability
Your guarantor is responsible for repaying the loan in the event that you default. They could have to refinance or sell their house as a result. Until the guarantee is withdrawn, the guarantor's property is still at risk, even if you make consistent payments.
Impact on Relationships
Going guarantor can strain personal relationships. Everyone involved needs to understand the risks and maintain open communication. Disputes often arise when expectations or responsibilities aren’t clearly discussed beforehand.
Legal and Financial Advice
It’s essential that both the borrower and guarantor get independent legal and financial advice before signing anything. Most lenders require this as part of the approval process. The guarantor must understand what they’re agreeing to and how it could affect their financial future.
Comparison Table: Traditional vs Guarantor Home Loan
Eligibility Criteria
To qualify for a guarantor home loan, both the borrower and the guarantor must meet certain eligibility criteria set by the lender. On the borrower's side, you’ll need to satisfy basic credit and income requirements.
Most lenders expect that you’re purchasing your first home and can manage regular repayments independently, even if you’re not starting off with a large deposit. This usually includes demonstrating a stable income and a clean credit file.
Some lenders may also want to see whether you could theoretically service the loan on your own in the future, without needing ongoing support from a guarantor. Keep in mind that you’ll likely still need to cover other upfront costs such as stamp duty and legal fees.
The guarantor also has to meet specific criteria. Typically, they must be a close family member, most often a parent or sibling. They’ll need to own a property with enough equity to secure part of your loan, usually 20%.
A strong financial standing is also essential: this includes a stable income and a solid credit history. Lenders may review the guarantor’s age, especially if they are close to retirement, as this could impact their ability to meet obligations if called upon. These checks are in place to ensure both parties can manage the responsibilities of the loan over the long term.
Application Process
- Assess borrowing capacity and eligibility with a mortgage broker or lender
- Choose a loan product and identify a willing guarantor
- Provide documentation (ID, payslips, proof of guarantor's property value)
- Both parties seek legal advice
- Submit application and wait for approval
Documentation Needed
- Proof of income
- Savings history
- Property valuation
- Guarantor’s mortgage and title documents
- Identification and legal declarations
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Timeline
The process can take 4 to 8 weeks depending on the lender and how quickly you and your guarantor provide the required documents. Pre-approval can speed things up and give you confidence while house hunting.
Property Equity and Its Role in Guarantor Home Loans
A key element in guarantor home loans is the use of property equity to secure the loan. Equity refers to the portion of a property’s value that is owned outright, without any mortgage attached. For guarantors, this equity becomes a form of collateral that reduces the lender’s risk.
For example, a parent who owns their home outright or has substantial equity can use a portion of it to guarantee up to 20% of their child’s loan. This guarantee bridges the gap between the borrower’s deposit and the lender’s minimum requirement, often eliminating the need for lenders' mortgage insurance.
The property being used as security must be assessed by the lender, and in most cases, a formal valuation is required. It’s important for guarantors to understand that if the borrower defaults, their equity could be at risk. That’s why lenders require the guarantor to demonstrate financial stability and seek independent legal advice. Borrowers and guarantors can also use online tools, to model different scenarios and understand how equity contributions affect loan approval and repayment forecasts.
Alternatives to Guarantor Home Loans
First Home Guarantee Scheme
Run by Housing Australia, this scheme allows eligible buyers to purchase a home with as little as 5% deposit without LMI. The government guarantees the remainder. It’s limited to certain property types and price caps, and places are capped annually.
Shared Equity Schemes
Some states offer programs where the government co-purchases a portion of the property, reducing the loan size and deposit needed. For example, Victoria’s Homebuyer Fund contributes up to 25% of the purchase price, helping first home buyers avoid LMI and lower their monthly repayments.
Conclusion
A guarantor home loan offers first home buyers in Australia a way to enter the property market without needing a large deposit or paying lenders mortgage insurance, provided they have a trusted family member with sufficient property equity willing to act as guarantor.
While this arrangement can ease financial barriers and boost borrowing power, it also places legal and financial responsibility on the guarantor if repayments aren’t met. This is why both parties must fully understand the implications, seek independent legal and financial advice, and communicate clearly throughout the process. It’s also important to remember that this is not the only option.
Alternatives such as the First Home Guarantee scheme or shared equity programs may suit some buyers better. Before committing, potential borrowers can use resources like the Empower Money to assess borrowing limits and understand repayment capacity, helping them make more informed and confident decisions.
