Guarantor Home Loans
Guarantor home loans are now the only way to borrow 100% to 110% of a property’s purchase price in Australia.
After the global financial crisis, traditional no deposit home loans were withdrawn from the Australian market, leaving guarantor home loans as the only no deposit option.
With the help of a guarantor, many Australians are getting their foot into the property market sooner and realising their home ownership dreams.
How do guarantor loans work?
Your guarantor will provide a guarantee for your home loan by using their property as security.
Once you have paid off part of your loan or your property has increased in value, you can apply to remove the guarantee.
Guarantor loans cost less than standard home loans because you can borrow up to 100% of the property value plus the costs of completing the purchase including stamp duty, mortgage set up costs and legal fees.
Of the other no deposit home loans available, guarantor home loans are the most popular for that reason.
Other benefits include:
- Reducing the risk to your guarantor: Some lenders allow you to limit the size of the guarantee.
- Avoiding Lenders Mortgage Insurance (LMI): Depending on the property price, you can save tens of thousands of dollars in upfront costs.
You may only need as little as $3,000 to buy a home!
How is the mortgage for the guarantee structured?
The loan is secured by both the property that you are buying and the property owned by the guarantor.
If your parents already have a home loan on their property, the “guarantee” is secured using a second mortgage behind their existing mortgage.
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.
There is no maximum loan size but in order to borrow over $1,000,000, you have to be in a strong financial position with a clear credit history.
Who can be a guarantor?
Most banks will only allow parental guarantees, that is, a guarantee from your parents.
The reason is that it’s assumed you have a good relationship with them so you’re more likely to make your your mortgage repayments and eventually remove the guarantee.
Some lenders may consider guarantees from immediate family members such as siblings, grandparents, spouses, de facto partners or adult children.
Friends, workmates or associates are not normally accepted but they may be considered if you’re able to meet stricter lending criteria.
What if my parents already have a home loan?
That’s okay, as long as they have sufficient equity, the lender can apply a second mortgage.
How do lenders work out if your guarantor has enough equity in their property?
Your parents’ existing mortgage plus the new limited guarantee must be less than 75% – 80% of the value of their home.
For example, let’s your mum and dad had $100,000 left owing on their mortgage and they needed to provide a limited guarantee of $100,000 to help you buy a studio apartment.
Total debt secured would be $200,000 so their home would need to be worth $267,000 or more for the guarantor loan to be approved.
Use our guarantor home loan calculator to work it out.
Can banks have a problem with a second mortgage?
If your parents already have a mortgage then the guarantee will need to be secured by a second mortgage.
This isn’t a problem in itself but it can be an issue if your application isn’t submitted to the bank correctly.
Do not commit to a property until:
- Consent for the second mortgage has been granted by your guarantor’s lender.
- A bank valuation has been completed on your guarantor’s property.
- Your lender has issued a formal approval.
There is a small risk that the lender will deny or withhold consent so ask the bank why this may be the case.
It may be that there isn’t enough equity in their property.
The method of calculating existing equity can be very complex so please use the guarantor loan calculator or call us on 1300 889 743 for more information.
What if my parents are retired?
Most Australian banks will not accept a security guarantee from a retired or elderly guarantor.
Not every lender assesses guarantors this way.
Some of our lenders can accept guarantees from people close to retirement, pensioners and self-funded retirees over 65 years of age as long as they seek legal advice prior to signing the loan offer.
My bank won't let me consolidate debt
Very few lenders will allow you to buy a home and consolidate your credit cards or personal loans at the same time.
We know which lenders will allow you to roll everything into one simple, low repayment each month.
Bear in mind that you can only consolidate a few minor debts.
If your debts are over 5% of the purchase price, you won’t be able to roll them into the mortgage with any lender.
Your repayments must be on time, every time, before a lender will allow you to combine them into your new mortgage.
Only some lenders accept second home buyers
Many lenders will not allow second home buyers to apply for a guarantor loan because it’s expected that you should have a strong enough asset position to buy a property on your own.
This is particularly unfair to people who have gone through a divorce or illness that has forced them to sell their previous home.
We know which lenders are less conservative when assessing their guarantor home loan applications.
Do I need to prove any savings?
Even though guarantor loans allow you to borrow 100% of the purchase price, many lenders still require you to have 5% of the purchase price in genuine savings.
Other lenders do not have a specific policy regarding this but it’s likely their credit scoring system will decline your loan based on your asset position relative to your income.
Banks view people who have a high income and a low asset position to be a high risk.
Many young people spend money on their education, a car, a wedding or travelling and only begin saving for a house later in life.
These people are not high risk borrowers, they just have different priorities!
The trick to getting approved is to apply with a lender that takes a common sense approach to your situation.
Can I borrow more than 105%
In the past, lenders commonly allowed people to borrow 120% with a guarantor home loan but these loan types are no longer available.
Today, the maximum that you can borrow now is 105% of the purchase price and 110% if you have debts to consolidate.
Many people wishing to buy a home have significant consumer debts such as credit cards and personal loans.
If you’re in this situation, you may be able to consolidate debts and purchase a property as long as your total debts are no more than 5% – 10% of the purchase price.
When can I remove the guarantee?
Ultimately, you don’t want the guarantee to be in place for the entire life of your mortgage.
You should apply to remove the guarantee when the following conditions have been met:
- You can afford the repayments without any assistance.
- Your loan is for less than 90% of the property value (ideally 80% or less).
- You haven’t missed any payments in the last 6 months.
Most people are able to remove the guarantee somewhere between 2 and 5 years after they initially set up the loan.
Many guarantees are set up because the borrower has no deposit so removing the guarantee most often depends on how much the property appreciates in value and how much in extra repayments the borrower can make.
You can still remove the guarantee if you owe more than 80% of the property value but you may be charged LMI.
Why is there no LMI premium in the guarantor home loan set up?
Borrowing more than 80% LVR is seen as a high risk to most banks so they apply LMI to your home loan and charge you the premium.
This fee can be quite significant, easily costing more than $10,000.
However, with a guarantee as additional security, you’re able to borrow under 80% LVR and avoid LMI altogether.
How much is the guarantee limited to?
For the majority of guarantor loans, we ask the lender to limit the guarantee secured on the guarantor’s property.
That means they’re not liable for the entire amount of the loan, 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 were buying a property for $500,000 and borrowing $525,000 including the costs to complete such as stamp duty, 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)
Is this all too complicated?
Just let our guarantor loan calculator figure it all out for you.
What types of guarantees are there?
With this type of guarantee, the guarantor uses real estate that they own as additional security for your loan.
If the guarantor already has a loan on their property, then the bank can take a second mortgage as security.
This type of guarantee is most often used when first home buyers are buying a home, have an excellent income, but no deposit.
The guarantor is often referred to as an “equity guarantor”.
Security & income guarantee
A security and income guarantor is most often a parent helping their son or daughter who is a student or has too low of an income to buy their first property.
The lender will use their parents’ property as additional security and rely on the parents income to prove that they can afford the home loan.
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 may also be considered as guarantors.
A limited guarantee is where only part of the loan is guaranteed by the guarantor.
This is most often used with security guarantors so as to reduce the potential liability secured on the guarantor’s property.
Guarantees can either be limited or unlimited, depending on both the guarantors’ wishes and the lender’s requirements.
What are the names used for guarantor loans?
Every lender seems to have come up with their own name for guarantor loans!
- St George Bank uses the term ‘Family Pledge’
- Commonwealth Bank uses the term ‘Family Support’ or ‘Family Equity’
- Rams uses the term ‘Fast Track’
- ANZ and Westpac use the term ‘Family Guarantee’
All of these terms mean essentially the same thing.
Most of these terms refer to a security guarantee, since only a few select lenders allow other types of guarantees.
There are big differences between the bank’s credit guidelines, loan types and discounts for family guarantee loans.
The risks of being a guarantor are often exaggerated
On paper, the guarantor is ultimately liable for your home loan should you default.
There is a big fear that banks move quickly to sell your home to cover the remaining debt but the reality is that banks try everything to solve the problem before taking this drastic decision.
The reason is that there is often a significant process and cost involved in trying to sell your home.
Chances are, they will struggle to break even going down this path so they would much rather that you keep paying your mortgage.
To do this, they will want to work out why you’re having trouble managing your repayments and whether a solution can be found.
You’ve lost your job
Let’s that you’ve recently been made redundant from your job as a maths teacher.
Lenders take the view that you have a good chance of getting another job soon.
In the meantime, the bank may reduce your mortgage repayments for a period of time until you’re able to find work again.
Your property will be sold first
Should you still not be able to make your home loan repayments, lenders will always take action on your property first before making the guarantor liable to pay out the outstanding debt.
Of course, it’s important to bear in mind that repossession will only commence if the mortgage has been in arrears for 90-180 days.
Don’t forget the limited guarantee
What if the sale of your child’s property isn’t enough to cover the home loan?
Remember, there is only a limited guarantee in place which means the guarantors are only liable for up to an agreed amount.
This is usually around 20% of the purchase price plus the costs of stampy duty, conveyancing fees and other associated home loan costs.
For example, if the outstanding debt is for $700,000 but the limited guarantee is for only $210,000, the guarantors are only liable to cover the outstanding mortgage up to $210,000.
Obviously, if the property sold for $700,000 or more they wouldn’t have to worry about anything.
However, if the property only sells for $440,000, the guarantor will have to cover up to $210,000 with equity in their property to cover the shortfall but they won’t be liable for the remaining $50,000.
Of course, if the property sells for $590,000, then the guarantor would be liable for $110,000.
There are still more option left!
If the guarantors don’t have the equity or savings to cover the outstanding amount, they can apply for:
- A second mortgage on the their property.
- A personal loan.
If all of these avenues have been exhausted, banks will sell the guarantor’s property but will only take enough of the proceeds to cover the home loan up to the limited guarantee.
The rest of the sales proceeds will go to the guarantors.
Should I act as guarantor?
Choosing to act as a guarantor a big decision so it’s recommended that you seek independent financial advice. Ask yourself the following questions:
- How big is the limited guarantee that you’re committing to? Are you able to cover any outstanding costs should things go pear-shaped?
- Under what condition will you be liable to pay? Generally, banks will only look to take action if the mortgage is in arrears for 90-180 days.
- What is the character of the person that you’re guaranteeing? This may be difficult to answer if it’s your own son or daughter but you should be honest in answering this question.
If your child is struggling to save a deposit but you want to avoid some of the risks ofacting as your guarantor, a parent assist home loan may be better suited to your situation.
Get legal advice
We recommend that guarantors have a preliminary discussion with their solicitor before applying for a mortgage and then seek secondary legal advice to go through the ‘Guarantee & Indemnity’ documents.
Ask yourself the following questions:
- How big is the limited guarantee that you’re committing to?
- Are you able to cover any outstanding costs should things go pear-shaped?
- Under what condition will you be liable to pay?
- What is the character of the person that you’re guaranteeing?
If you’re struggling to save a deposit but want to avoid some of the risks of asking mum and dad to act as guarantor, a parent assist home loan may better suit your needs.
Speak to a specialist mortgage broker
There are many aspects of a guarantor home loan that a specialist broker can help you to understand.
- Getting approved: It’s a popular no deposit solution but it doesn’t mean it’s easy to get approved.
- Limited guarantee: Not all lenders allow for a limited guarantee meaning more potential risk to your parents.
- The exit strategy: We can help you work out a strategy of either making extra repayments, or refinancing to remove the guarantee in as little as 2 to 5 years.
- Protecting the guarantor: With the right insurance, you can provide extra protection to your guarantor.
If you don’t set up your mortgage in the right way, you may not be able to remove the guarantee as quickly as you would like and put your parents in a high risk position.
Please call our mortgage brokers on 1300 889 743 or enquire online to find out how we can help you.
Why choose a guarantor loan?
- You don’t need a deposit, allowing you to buy a home sooner
- Save thousands by avoiding LMI
- Accessdiscounted interest rates
- Consolidate some minor debts such as credit cards and personal loans.
- Limit the size of the guarantee.
Our mortgage brokers are experts in guarantor home loans.
Please call us on 1300 889 743 or enquire online and we can go through your options with you.
Can I get a 100% construction loan?
It’s possible to borrow 100% of the land and construction costs if you have a guarantor.
However, be aware that many lenders don’t allow “loan increases” on guarantor loans.
What this means is that if you buy the land and then apply for the construction loan later, it may be declined!
Please call us on 1300 889 743 so we can help you structure your application so it gets approved!
Can I buy an investment property?
Only two or three lenders in Australia will accept no deposit investment loans supported by a guarantor.
We can assist you to buy one investment property but buying multiple investment properties is not normally accepted.
This is because the guarantor is taking an unnecessarily high risk while the borrower is making all of the potential profit.
If the guarantor is in a strong financial position, buying multiple investment properties may be possible.
Can I get an 80/20 low doc guarantor loan?
Low doc loans cannot be used with the support of a guarantor as lenders are very conservative with their assessment of no financials home loans.
It may be possible to get around this if the guarantor takes out a mortgage on their property and lends this to you so you can use it as a deposit.
Although this is not an ideal solution, it can work for some borrowers.
It’s known as the 80/20 method since you’ll borrow 80% of the property value while your family member borrows the other 20% on their property.
Many lenders don’t accept this method of financing so please enquire online to speak to a mortgage broker that understands this loan structure.
Example of using a guarantor if you have no deposit
Nick has been renting for a couple of years and decides now is the time to buy his very own home.
He’s found a nice 3 bedroom house not far from where he works. The property is worth $500,000 but he knows if he doesn’t act fast he’ll miss out.
The problem is that he hasn’t been able to save up a deposit to get a home loan because he’s been renting.
He needs at least 5% plus costs in order to qualify for a mortgage.
His parents – who are both retired – are willing to gift him the money for the deposit but it’ll take them around 3 months or so for them to save the money to give to him.
If that weren’t enough, the gifted deposit wouldn’t be classed as genuine savings and it’d take Nick another year or so to save a 5% deposit.
Instead of saving the money and gifting Nick the money for the deposit, his parents use the equity in their property as security for his home loan.
Their home is valued at $600,000 with around $255,000 owing on their mortgage.
Since both of Nick’s parents are retired, there is one lender that will accept this particular scenario.
Using their parents’ property as security for a home loan, Nick is able to able to borrow up to 105% of the purchase price to cover the home loan plus the costs of stamp duty and conveyancing fees.
If Nick were to buy the property with his own 5% deposit, he’d be paying around $10,000 in purchase costs plus another $20,000 in LMI.
By asking his parents to act as guarantor on his mortgage:
- Nick was able to quickly buy the property before someone else did.
- He was able to avoid LMI.
- He was able to the few thousand dollars that he saved for the deposit as extra repayments on his mortgage with enough left over to buy some furniture.
Example of using a guarantor to consolidate debt
Alicia and Chris are about to get married and want to buy a family home.
They’ve found a perfect place in a quiet suburb valued at $700,000.
Their combined income is around $200,000 and they’re currently paying around $1,000 a week in rent for a studio apartment in the city.
Alicia and Chris also have a car loan with $30,000 owing and a credit card.
The credit card is almost at its limit at $6,000 but they’ve been making their payments on time.
They’re paying $750 a month for their car loan and $180 a month in credit card repayments.
They’ve been managing their bills and debts perfectly but they’re worried that they won’t be able to manage all of their financial commitments by having to make home loan repayments as well.
Luckily, Chris’ parents are working full time and own a home worth $1.2 million with around $600,000 owing on the mortgage.
By using the guarantor option, their bank is willing to lend up to 105% of the purchase price to cover stamp duty and conveyancing fees.
On top of that, they’re able to consolidate one of Alicia and Chris’ debts into the home loan.
Effectively, they’ll be borrowing about 109% of the purchase price.
They decide to consolidate the car loan because it has the most amount of debt owing.
With their home loan approved, Alicia and Chris are paying $4,287 per month in mortgage repayments.
This includes their car loan repayments.
How much are the couple better off by consolidating this debt into their loan?
Well, by not consolidating and continuing to paying their debts separately, Alicia and Chris would have been paying $4,876 per month.
- They are $589 better off per month and are able to better manage their debt.
- They avoided having to save a deposit to buy the property.
- They avoided the cost of LMI.
- They’re enjoying their new home before they tie the knot.
- They were able to get a professional package and set up an offset account to help them reduce their interest bill.
Example of grandparents acting as a guarantor
Since graduating from university, Grace scored herself a great job working as a designer at an advertising agency.
Wanting to go out on her own and move out from her parents’ house, she wanted a place of her own that was closer to her job in St Kilda.
Grace really had her heart set on buying her own unit so she could build up equity and invest in real estate in the future.
She heard some horror stories about how some landlords treated tenants and buying rather than renting would provide her with a place to truly call home.
The problem was that due to her studies and the hours she put into unpaid internships, she was only able to save a small deposit thanks some casual work.
Her parents wanted to help but could only provide with a modest gift – it just wasn’t enough to cover the deposit Grace needed.
She heard about guarantor loans but, unfortunately, her Mum and Dad recently refinanced their mortgage drew down some equity to go on a round-the-world trip for their twentieth anniversary.
Grace could have waited to save a larger deposit but being single and with the rate at which property prices were increased in inner city Melbourne, she need to act fast.
Although her parents could only provide a little help, Grace’s grandparents owned a couple of investment properties and they had enough equity to provide her with a security guarantee.
It’s quite common for grandparents to act as guarantors but there are only a handful of lenders that will consider them.
The trick for Grace was choosing the right lender so she wisely spoke with a mortgage broker for help.
The issue is not so much proving that you’re related to your guarantor, although birth certificates may sometimes be requested.
The problem with getting approved comes down to the age of the grandparents and what their exit strategy is.
The exit strategy needs to prove that Grace’s grandparents can pay out their limited guarantee should Grace default on her mortgage.
They need to be able to do so without falling into financial stress.
As per standard guarantor loan policy, Grace and her grandparents are interviewed prior to the application to ensure they understand the impications of entering into an agreement.
Grace’s grandparents are around 60 years old and approaching retirement age (65).
However, Grace’s pop plans to work past retirement age.
Depsite this though, they own two investment properties and are able to sell one of these properties should they need to pay out their limited guarantee in the event of Grace defaulting.
Grace’s grandparents were able to provide good evidence for their exit strategy and, with enough equity in one of their investment properties, they were to provide a security guarantee.
Grace wanted to put some of her savings and the small gift from her parents towards the purchase.
However, after speaking with her mortgage broker, her mum and dad and her grandparents, she decided to keep the funds to help her buy furniture for her new place and to cover the first few mortgage repayments.
Grace successfully started a new chapter in her life with her first home close to her dream job.
How can you help me get approved?
We specialise in guarantor home loans and can quickly assess your situation, work out which lenders can approve your application and which loans would be the cheapest for your situation.
Our additional free services include reminding you of when it may be possible to remove the guarantee and discussing the proposed loan with the guarantor to make sure that they understand and are comfortable with the terms.
To talk to a mortgage broker that specialises in guarantor supported lending please enquire online or call us on 1300 889 743.
Still have questions? Feel free to comment below and we’ll get back to you as soon as possible.