Guarantor home loan guide: pros, cons and how to qualify

What is a guarantor home loan?

A guarantor home loan allows someone else - like your parents or someone close to you, to guarantee a portion of your loan. 

They do this by putting up equity - normally a property they own - as security against the home loan. This helps reduce the overall risk of the home loan for the lender. By acting as a guarantor means they will be responsible for paying back the portion of the loan they have guaranteed - if you are unable to. 

You should know that you may also come across a parent guarantor home loan, family security guarantee, family equity loans, family guarantee loan or family pledge loan. These are similar products, but the terms could vary depending on the home loan lender. An example of this are family equity loans, where a family member actually makes all/a portion of the repayments on a loan - rather than just putting up the equity or security on the loan.

Who can act as my guarantor?

The most common guarantors are family members, including parents, parents-in-law, stepparents, grandparents, a sibling or a legal guardian.

To act and qualify as a guarantor they will need to have:

• Sufficient equity in their own home
• Stable income to demonstrate they can meet the loan repayments on the portion they are guaranteeing, in addition to any existing home loan they have on other property
• A good credit history
  

If the guarantor has a mortgage on the property they are putting up for security the lender may require they refinance it with them - though this will depend on the individual lender.

Now let’s understand how these loans work, by using a practical example. 

How does a guarantor home loan work?

The easiest way of understanding how a guarantor home loan works is to look at a real world example.

The first thing to know is that you typically need a 20% deposit + purchase costs ( e.g. stamp duty) to buy a property. If you have saved less than this - say 10% - you are likely to have to pay lenders mortgage insurance (LMI). This is to cover the risk the lender takes on when they approve your home loan. 

Having a guarantor means they can help you put up a 20% deposit, so you can qualify for the loan, purchase the property immediately and avoid paying LMI. Your guarantor must then provide security for this portion of the loan, and they are discharged as a guarantor when their portion of the loan is repaid.  

Tip: If you have a larger deposit you could also qualify for a better interest rate.

How much can I borrow with a guarantor home loan?

Typically there is no different maximum loan size that applies to a guarantor home loan.

You can actually borrow up to 110% of the purchase price of a property with a guarantor home loan. This means you can borrow the entire purchase price plus other upfront purchase costs like stamp duty and conveyancing. If you have not been able to save for these extra costs this is a very useful feature of this type of loan. You can use our home deposit calculator to estimate the upfront costs associated with purchasing a property.

You - and the guarantor - will still be subject to standard borrowing capacity tests to ensure you can service or pay off the loan. Home loan providers take a number of factors into account when they assess your application, including all your monthly expenses, outgoings and debts against your monthly income. They need to feel comfortable that you can make the repayments based on your income, outgoings and lifestyle.

Tip: Use our online calculator to work out how much you could borrow - it's as easy as filling out a few personal details.

Who is eligible for a guarantor home loan?

Anyone can apply for a guarantor home loan, though they are particularly popular with first home buyers who may not meet the borrowing criteria set by lenders, or who don’t want to wait to save for a deposit. This type of loan is also primarily designed for owner occupiers, and not for an investment property purchase. 

Otherwise to qualify for a guarantor loan you - and the guarantor - will need to meet standard lending criteria, such as having a stable income and a good credit history. 

Tip: You can check your credit score for free from any online credit score provider, usually within minutes. This consists of a record of the amount of money you’ve borrowed, how many credit applications you’ve made and if you pay on time.  

What are the benefits of a guarantor home loan?

The primary benefits of qualifying for a guarantor home loan is that you:

• Get onto the property ladder sooner rather than later
• Maximise the amount you can borrow, including up to 110% of the purchase price and associated costs.
• Avoid or reduce Lenders Mortgage Insurance (LMI), if you have less than a 20% home loan deposit.
• Access a better interest rate as you will be lowering your loan-to-property value ratio.
• Are still eligible for the First Home Owners Grant (FHOG), a lump sum payment from the government toward your first property purchase.
  

Like any financial product, you have to be aware of the inherent risks of this type of home loan. 

What are the risks of a guarantor home loan?

There is risk inherent in many types of financial products, and guarantor loans are no exception, including that:

• You will pay more interest over the life of the loan if you opt to borrow 110% of the property value vs. 80% if you had a 20% deposit.
• Your guarantor could limit their options to, for example sell their property, if they agree to act as your guarantor. 
• The guarantor is financially liable if you are unable to make the repayments. 
  

Tip: You - and your guarantor - should read and understand the full terms of the loan and seek independent legal and financial advice before signing it.

What happens if you default on your home loan?

Like any financial agreement, a guarantor home loan is a serious commitment for both you and the guarantor, especially if you default.

Defaulting means not being able to meet your repayments. 

This could happen if your circumstances change - like losing your job and income. The lender has the right to sell your property to recover the loan. If the sale price doesn’t cover the outstanding loan amount, the lender has the legal right to seek the limited guarantee amount from your guarantor.

Tip: If you get into financial difficulties you should contact your lender as soon as possible to discuss your current situation. It’s in their interest to help you work out a solution.

When can you remove the guarantee?

You can discharge a guarantor when your loan amount is up to 80% of the property value. This means when you have paid down the debt or the market value of the property has gone up. If your loan amount is greater than 80% you might still be able to discharge the guarantor but LMI would apply.

Apply for a home loan in 3 easy steps 

Wondering how to apply for your first home loan? 

With Yard it's a simple, three step online application you can complete anytime, from any device.

Step 1
Tell us about yourself: Securely share your personal financial details. We verify your identity, credit history and financials online.

Step 2
Design your loan: Design the features of your loan to match what works best for you.

Step 3
Get approved! When all of your details check out, we provide you with the decision on your loan!

We then settle your loan and take care of the rest so you secure your dream home asap!
Armed with this knowledge you should now be in a better position to decide if a guarantor home loan is right for you.

Have any questions about guarantor home loans? We’re here to help, and our local team are available to chat at a time that suits your schedule.