Limited Guarantee Home Loan

What Is a Limited Guarantee On A Home Loan?

A limited guarantee helps reduce the risk of being a guarantor while still allowing the borrower to access the benefits of a guarantor loan.

Instead of securing the entire mortgage, the guarantor covers an agreed portion of the loan, often just enough to help the borrower meet deposit requirements or avoid paying Lenders Mortgage Insurance (LMI).

Although this approach limits exposure, it can be more complex than a standard guarantee. With multiple parties involved, lenders usually require clear documentation and independent legal advice to ensure everyone understands their responsibilities.

Can You Borrow 100% Of The Property Value With A Limited Guarantee?

Yes! You’ll be able to borrow up to 100% LVR (Loan to Value Ratio) or 100% of the property value.

You may also qualify to receive other benefits, such as Lenders Mortgage Insurance (LMI) waivers.

How Does A Limited Guarantee Work?

In a standard guarantor loan, the guarantor provides their property as security for the entire mortgage. However, limited guarantees work quite differently.

As with a normal guarantor home loan, the guarantor will need to provide their property as additional security for the lender.

However, the difference is that the guarantor is liable for only part of the borrower’s mortgage.

How Is The Limited Guarantee Calculated?

Generally, the size of the limited guarantee can be calculated with the help of the amount that you’re looking to borrow and the price of the property. It’s calculated as:

Value of the limited guarantee = (loan amount / 0.8) – property price

For example, if you’re borrowing 105% of the property value for a $500,000 property to cover additional costs like stamp duty, then the limited guarantee will be:

($525,000 / 0.8) – $500,000 = $156,250

Keep in mind that every bank has different ways to calculate the limited guarantee. You can also work out the size of the limited guarantee by using our Guarantor Loan Calculator.

Disclaimer: The above formula is to work out how much limited guarantee you’ll need to keep your total LVR at 80%. This is because any home loan over 80% LVR is considered risky and will require the borrower to pay a mortgage insurance fee (LMI).

Who Can Be a Guarantor for a Limited Guarantee Home Loan?

The guarantor needs to have sufficient equity in their property for the lender to approve the guarantor.

It’s also essential that their total debt, which is their current home loan plus the limited guarantee, should be less than 80% of the property value.

For example, if the value of the guarantor’s property is $350,000 then the total sum of their existing debts and the limited guarantee they’re offering should be no more than $280,000.

In some cases, the lender will allow the guarantor to take out a second mortgage if they have existing debt on their property. You can use this as security for a guarantee.

What Are The Benefits Of Using A Limited Guarantee?

A limited guarantee lets you receive the same benefits of a guarantor home loan. These include:

• You can borrow 100% of the purchase price.
• You can avoid paying Lenders Mortgage Insurance.
• The liability of the guarantor is reduced.
• You won’t need to pay anything upfront.

What Should You Consider Before Becoming A Limited Guarantee Guarantor?

Before you decide to become a guarantor for someone, you need to consider:

• Your financial situation: Are you fully aware of your financial situation and that of the borrower you’re going guarantor for? The last thing that you would need is to pay off someone else’s mortgage.
• Your relationship with the borrower: The closer you are with the person you’re guaranteeing, the better chance you have of recovering your money if anything does happen.
• Your ability to make repayments: It’s essential to ensure that you can cover monthly repayments before you commit to the loan. If you need outside help to cover these costs then you may need to reconsider your decision.
• The loan size: You can further reduce the risk exposure to your security by making sure that the loan doesn’t exceed more than 90% of the property value.
• Getting professional advice: It’s recommended that you speak with a professional to obtain independent legal and financial advice. This can help you understand how it will affect your financial situation.

Do You Want To Apply For A Limited Guarantee Home Loan?

Our mortgage brokers specialise in guarantor home loans with a limited guarantee.

Call us on 1300 889 743 or complete our free online assessment form to find out whether you’re eligible for this type of home loan arrangement.