Guarantor Loans
A guarantor home loan is a type of loan where a family member, typically a parent, offers their property as security to help you secure a mortgage. This arrangement allows borrowers to access between 100% to 110% of the property’s purchase price, depending on the type of loan.
In a guarantor loan, the secured portion of the loan is usually 80% of the property’s value, with the remaining balance covered by the family member’s property as a guarantee.
How Much Can You Borrow With A Guarantor Loan?
The amount you can borrow varies based on the type of borrower:
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First-home buyers: Up to 105% of the property value.
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Construction loans: Up to 105% of the combined land value and construction cost.
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Refinancing: Up to 100% of the property value.
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Debt consolidation and purchase: Up to 110% of the property value.
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Investors: Up to 105% of the investment property value.
If you borrow over $1,000,000, additional credit requirements will apply.
Benefits of a Guarantor Home Loan
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No deposit required, allowing you to buy a home sooner.
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Avoid Lenders Mortgage Insurance (LMI), saving you money.
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Some lenders offer discounted interest rates for guarantor loans.
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You can consolidate minor debts like credit cards when purchasing your home.
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The size of the guarantee can be limited, reducing the exposure for your family member.
A guarantor home loan can be a smart option for those who need a helping hand from family to get onto the property ladder sooner.
We can help you buy or refinance anywhere in Australia
How Do Guarantor Loans Work?
A guarantor home loan involves a family member, often your parents, providing a guarantee for your loan, which is secured against their property. This arrangement allows you to enter the property market sooner, even if you don't have a deposit saved up.
Once you've paid off part of your loan or your property has increased in value, you can apply to remove the guarantee. Guarantor loans have gained popularity in recent years because they typically cost less than standard home loans and can help you get into the property market faster.
Additionally, some lenders now offer the option to limit the size of the guarantee, reducing the financial exposure for your family member. This makes it an appealing choice for many first-time buyers looking to take the leap into homeownership.
How Is The Mortgage for the Guarantee Structured?
In a guarantor home loan, the loan is secured by both the property you’re purchasing and the guarantor’s property. This ensures that the lender has extra security if you are unable to meet your repayment obligations.
If you opt for a limited guarantee, the guarantor’s exposure is reduced, as they are only liable for a portion of the loan amount. This structure is ideal if your guarantor already has a home loan, as the guarantee will be secured with a second mortgage behind their existing loan.
How Much Is The Limit of The Guarantee?
For most guarantor loans, the size of the guarantee is limited, ensuring the guarantor isn’t liable for the full loan amount. The limit is typically calculated by considering the difference between the loan amount and 80% of the property’s purchase price, then dividing this by 0.75.
For example: If you are purchasing a property for $600,000 and borrowing $650,000 (including expenses like stamp duty), the calculation would be:
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($650,000 loan amount – (0.8 * $600,000 purchase price)) / 0.75
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$170,000 / 0.75 = $226,667
So, in this example, the limited guarantee would be $226,667.
What Types of Guarantees Are There?
1. Security Guarantee:
The guarantor provides their property as additional security for your loan. If they already have a mortgage on their property, the bank can take a second mortgage. This is commonly used for first-time buyers with good credit but no deposit, and the guarantor is often referred to as an equity guarantor.
2. Security and Income Guarantee:
In this case, the guarantor (often a parent) not only offers their property as security but also their income to demonstrate the loan’s affordability. This is typically used when a borrower is a student or has a low income.
3. Family Guarantee / Parent Guarantee:
When the guarantor is a direct family member (usually a parent), the loan is referred to as a parental guarantee. Other family members, such as grandparents or siblings, can also be considered, but this is handled on a case-by-case basis.
4. Limited Guarantee:
With this guarantee, only part of the loan is secured by the guarantor’s property. This is often used to reduce the risk to the guarantor, making it a more attractive option for them. The guarantee can be either limited or unlimited, depending on both the guarantor’s wishes and the lender’s conditions.
Our award-winning brokers are experts in getting even the most challenging loans approved.
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FAQs about Guarantor Loans
Real-Life Benefits of Guarantor Home Loans: Catherine's Story
Meet Catherine
Catherine, a first-time homebuyer from Melbourne, was facing a common challenge shared by many young Australians. Like countless others, she struggled to save for a deposit while juggling rent payments, which seemed to stretch her finances even further.
Despite her desire to step onto the property ladder, the rising property prices in her city felt like an insurmountable hurdle, making homeownership seem like a distant dream.
Discovering Guarantor Home Loans
Everything changed when Catherine discovered the option of guarantor home loans. Instead of saving for a deposit or having her parents gift her the money, Catherine's parents can use the equity in their property as security for her home loan.
Their home is valued at $750,000, with around $300,000 owing on their mortgage. Despite both parents being retired, there is one lender willing to accept this guarantor arrangement, enabling Catherine to move forward with her home purchase.
By leveraging their property as security, Catherine can borrow up to 105% of the property’s purchase price, covering not only the home loan but also the associated costs such as stamp duty and conveyancing fees.
If Catherine were to buy the property with her own 5% deposit, she would face an additional cost of over $25,000 in Lenders Mortgage Insurance (LMI). LMI is a one-off fee charged when borrowing more than 80% of the property value, a cost that can be avoided by using a guarantor loan.
The Immediate Benefits
For Catherine, the advantages of using a guarantor loan were immediate and significant:
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No More Rent: Catherine was able to stop paying rent and begin investing in her own property, building equity rather than paying someone else's mortgage.
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Beating the Market: She managed to secure her apartment before property prices surged further, ensuring she got in at a better price than what might have been available later.
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Saving on Insurance: By using a guarantor, Catherine saved thousands of dollars by avoiding Lenders Mortgage Insurance (LMI), a costly one-off fee typically paid when borrowing more than 80% of the property's value.
Catherine’s story is a prime example of how a guarantor home loan can help first-time buyers step onto the property ladder and make homeownership more accessible and affordable.
Can You Help Me Get a Guarantor Loan Approved?
At Avenstone, we understand that navigating the complexities of a guarantor loan can be challenging, especially for first-time homebuyers. Our team of expert mortgage brokers is here to guide you through the process and ensure you get the best possible outcome.
Here’s how we can help:
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Tailored Advice: We’ll take the time to understand your financial situation and the role of your guarantor, ensuring that the loan structure suits your needs and goals. We’ll explain the benefits and potential risks of a guarantor loan in detail, so you can make an informed decision.
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Access to Multiple Lenders: Avenstone has access to a wide range of lenders, some of which are more flexible when it comes to guarantor loans. We’ll help you find a lender who is willing to approve your loan with the best possible terms.
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Guidance Through the Application Process: We’ll assist you in preparing your application, ensuring that all necessary documents are submitted accurately and on time. Our team will work with your guarantor to ensure their property is used as security in the right way, minimising any potential issues with the lender.
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Expert Negotiation: With extensive knowledge of the guarantor loan process, we can negotiate with lenders on your behalf to secure the most favourable loan conditions. This includes helping you avoid Lenders Mortgage Insurance (LMI) and finding a lender who accepts your guarantor’s situation.
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Ongoing Support: Our commitment doesn’t end once your loan is approved. We’re here to provide ongoing support, whether it’s helping with refinancing options to remove the guarantee in the future, or answering any questions that arise along the way.
By partnering with Avenstone, you’ll have an expert team on your side, ensuring that your guarantor loan is structured correctly and approved smoothly. Get in touch today to see how we can help you take the next step towards homeownership. Call us on (03) 9566 7247 or book a free 30-minute discovery call to get started and learn how we can help you get approved for a bad credit mortgage.
Years Experience
20+
in Residential & Commercial Banking