What is guarantor home loan?

• A guarantor home loan is one where a homebuyer’s family member offers their own property as security on a loan. It is one of the ways to borrow between 100% and 110% of a property’s purchase price. Essentially, 80% is the secured portion of the loan against the property value. The remaining balance of the loan not covered by the property value is the guarantee amount.
• Your guarantor will provide a guarantee for your home loan, which is secured on their property. In most cases, this is your parents assisting you in buying a home. The idea is for you to get into the property market sooner. Once you have paid off part of your loan or your property has increased in value, then you can apply to remove the guarantee. Guarantor loans have become very popular in recent years. As they cost less than standard home loans, they allow you to buy without a deposit and some lenders now allow you to limit the size of the guarantee.

Types of guarantee

• Security guarantee: With this type of guarantee, the guarantor uses their real estate as additional security for your loan. If the guarantor already has a loan on their property, then, in most cases, the bank can take a second mortgage as security. This type of guarantee is most often used when first home buyers with an excellent credit history buy a home but have no deposit. The guarantor is also called an “equity guarantor” by some lenders.
• Security and income guarantee: A security and income guarantor is often a parent helping their son or daughter who is a student or who has a low income to buy their first property. The lender will use the parents’ property as additional security and will rely on the parents’ income to prove that the loan is affordable.
• Family guarantee / parent guarantee: This is when the guarantor is directly related to the borrowers. Banks refer to this as a “parental guarantee”. Grandparents, siblings and other family members as guarantors are considered on a case by case basis.
• Limited guarantee: A limited guarantee is where only part of the loan is guaranteed by the guarantor. This is most often used with security guarantors to reduce the potential liability secured on the guarantor’s property. Guarantees can either be limited or unlimited, depending on both the guarantor’s wishes and the lender’s requirements.

Do I need to have savings?

• Even though guarantor loan allows you to borrow 100% of the purchase price, many lenders still require you to have 5% of the price in genuine savings. Sometimes a bank will accept a history of paying rent in place of genuine savings.

How much is the limit of the guarantee?

• For most guarantor loans we ask the lender to limit the guarantee secured on the guarantor’s property. This means they are not liable for the entire loan amount, only a portion of it. The size of the limited guarantee is calculated as follows:
  • Size of the limited guarantee = (Loan Amount – (0.8 * Purchase Price))/0.75.
  • For example, if you are buying a property for $500,000 and are borrowing $525,000 to cover your expenses such as stamp duty then the calculation would be:
  • ($525,000 loan amount – (0.8 * $500,000 purchase price))/0.75 $125,000/0.75 = A limited guarantee of $166,700 (rounded to the nearest $100)

Who can be a guarantor?

• Home Loans: Most banks will allow only a borrower’s parents to be guarantors. Some lenders can consider guarantees from immediate family members such as siblings, grandparents, spouses, de facto partners or adult children.
• Commercial: Unlike a residential guarantor home loan, the banks don’t require you to have your parents or a close relative act as guarantor for your commercial loan, although it’s typically the case. A business partner or a friend can also act as guarantor for the loan but the trick to getting approved is showing that they have a legitimate interest in the business. For example, if you’re buying a freehold office space in a company or a partnership, it’s quite common to have one of the directors or even a shareholder in the company put a residential or commercial property they own as security for the loan. In fact, the need for the guarantor to have a vested interest in the transaction may sometimes see parents being unable to provide a guarantee. To the bank, the deal has to make sense from a business perspective. More importantly, to qualify for a commercial guarantor loan, the guarantor must have partial ownership in the business/property.

My kid asked me to be a guarantor – what do I need to know?

• Your child is a grown-up now and wants to buy a home. Can you help? Yes, you can. Being a guarantor is one of the most popular ways of supporting their dream of buying a home in Australia. Every year, as much as 50% of first home buyers are helped by their parents by being a guarantor on their home loan. If your son or daughter has asked you to be a guarantor, then here are the things you need to consider before agreeing:
  • Can I afford being a guarantor? Have an overview of your financial position. It is a good idea to wait until you’re entirely debt-free before agreeing to be a guarantor. The most preferred situation would be to have full equity in your home and have a stable income. This is because you will need to make the home loan repayments you guarantee if your son or daughter fails to do so. Your plans in the next few years should not involve any significant financial expense. Suppose you have a plan to buy a new home or use your equity in your home for any purpose in the next couple of years. In that case, it may become difficult for you to do so if you’re an existing guarantor.
  • How much do I need to guarantee? You can guarantee the full loan amount. However, we recommend you to limit the guarantee secured on your property. In this way, you’re not liable for the entire loan amount, only a portion of it. Usually, when limiting the guarantee, lenders will require at least the amount needed to keep the loan at 80% of the property price. This will mean 20%-30% of the property price that you’ll be guaranteeing, which will include stamp duty and other costs of purchasing a home.
  • How long do I have to stay on the mortgage? Many guarantees are put in place because the borrower cannot put together the required deposit. Removing the guarantee depends on how much the property appreciates in value and how many extra repayments the borrower can afford to make. Most people are able to remove the guarantee 2 to 5 years after they initially set up the loan. The borrower, in this case, your son or daughter, should apply (it’s not automatic) for the removal of the guarantee upon meeting the following conditions:
    • They can make repayments without any assistance.
    • Their loan is for less than 80% of the property value.
    • They have not missed any payments in the last six months.
  • Can I withdraw from being a guarantor? There are only a couple of ways of withdrawing from being a guarantor. Once the agreement is signed, there is a 14-day cooling-off period. If you want to withdraw, this may be the best opportunity. Otherwise, you will have to stay as a guarantor until the borrower removes the guarantee. The only other way is to close the loan in its entirety by paying it off in full. Both you or the main borrower could do this. However, it may not be a possible option for you. That is why you need to make sure you have a strong relationship with the borrower before you agree to be a guarantor for their home loan.
  • I already have a home loan – can I still be a guarantor? Yes. As long as you have sufficient equity, some lenders on our panel can still secure a guarantee on your property using a second mortgage. You should declare all loans secured on the property, including business or commercial property loans; otherwise approval may be withdrawn before settlement. Do not commit to any property until:
    • consent for the second mortgage has been granted
    • a bank valuation has been completed
    • your lender has issued a formal approval.
  • Can I sell my home before the guarantee is removed? Yes, you can sell your home and transfer a portion of the proceeds to a term deposit temporarily. However, if the outstanding loan is more than 80% of the property value, the lender may not readily release the property. Selling a home before removing the guarantee could be a messy affair. That’s why you should get in touch with us before you put your home on the market.
  • Does being a guarantor affect my credit score? Let’s say the borrower stops making repayments and starts defaulting. You will be called upon, but only a last resort. Most guarantor loans will have several measures and precautions to collect from the main borrower first. This will include emails, letters and phone calls; all spread out within a reasonable period of time. If it comes down to you being called upon to make an outstanding payment as the guarantor, you will have some flexibility. You could always try to arrange with the lender to make smaller monthly payments. Lenders are usually lenient towards guarantors, which should avoid impacting your credit rating. However, should you fail to make repayments after making these arrangements, it will affect your credit score negatively.
  • For any legal advice, we highly recommend you get in touch with a trusted solicitor. They will help you understand the full implications of the guarantee and advise you accordingly.

How much can I borrow?

• First-home buyers: 105% of the property value
• Construction: 105% of the total land value and cost of construction
• Refinancing: 100% of the property value
• Debt consolidation and purchase: 110% of the property value.
• Investors: 105% of the value of your investment property.
• Note that borrowing over $1,000,000 will require you to meet additional credit requirements.

What if I cannot make repayments?

• If you cannot make your home loan repayments, then lenders will always take action on your property first before making the guarantor pay out the outstanding debt.
• Repossession will commence only if the mortgage has been in arrears for 90-180 days.

Guarantor home loan – benefits

• You don’t need a deposit, allowing you to buy a home now.
• Save money by not paying an LMI premium.
• Discounted interest rates are available from some lenders.
• You can consolidate some minor debts, such as credit cards, when you buy your home.
• You can limit the size of the guarantee to minimise your family member’s exposure.

Property purchasing costs

• Minimum of 5% deposit
• Stamp duty
• Property title transfer fee
• Registration fees
• Conveyancing fees
• Inspections including building/strata and pest
• Home loan set up fees
• Lenders Mortgage Insurance (LMI)

Property selling costs

• Agent Fees
• Marketing Costs
• Conveyancing Fees
• Capital Gains Tax (CGT)
• Presale Repairs and Renovations
• Styling/ Home Staging
• Auctioneer’s Fees
• Lender Fees
• Moving Costs