Buying a home in Australia can be a challenging and daunting process, especially with the ever-rising property prices. If you're a first-time homebuyer, you might find it particularly tough to save up for a substantial deposit. But don’t worry, there's a potential solution that could make your dream of owning a home a reality sooner than you think – a guarantor home loan.

In this blog, we'll walk you through everything you need to know about guarantor home loans in Australia, how they work, the benefits, risks, and much more.

What is a Guarantor Home Loan?

A guarantor home loan is a type of mortgage where someone else, usually a family member, agrees to secure your loan by providing additional security, often in the form of their own property. This person is known as the guarantor. By doing this, they help you to get approved for a home loan, sometimes with a lower deposit or better terms than you could secure on your own.

When you apply for a guarantor home loan, your guarantor offers their own property as additional collateral. This means that if you, as the borrower, are unable to repay the loan, the lender has the legal right to claim the guarantor’s property to cover the debt. It reduces the risk for the lender, making them more likely to approve your loan application.

Guarantors are usually close family members, such as parents, siblings, or even grandparents. It’s less common, but sometimes close friends or other relatives can act as guarantors too. The key is that they must have enough equity in their property to cover the guarantee they’re providing.

Benefits of a Guarantor Home Loan

One of the biggest advantages of a guarantor home loan is that it can significantly reduce the deposit you need to save. Typically, lenders require a deposit of at least 20% of the property's purchase price. With a guarantor home loan, you might be able to secure a loan with a much smaller deposit, sometimes as little as 5% or even no deposit at all.

LMI is an insurance that lenders require borrowers to pay if their deposit is less than 20% of the property’s value. This insurance protects the lender in case you default on the loan, but it can be quite expensive for you as the borrower. By having a guarantor, you can avoid paying LMI, potentially saving you thousands of dollars.

Since the risk to the lender is reduced with a guarantor, you might also be able to negotiate better loan terms. This could include lower interest rates, higher borrowing limits, or more favourable repayment conditions. Essentially, having a guarantor can make you a more attractive candidate to lenders.

Who Can Be a Guarantor?

Not just anyone can be a guarantor. Lenders have specific criteria for who can qualify. Generally, your guarantor needs to be an Australian citizen or permanent resident, have a good credit history, and own a property with sufficient equity. The exact requirements can vary between lenders, so it’s important to check with them directly.

It’s important to note that this can be more challenging if you’re an Australian expat, so be sure to speak with an experience Australian expat mortgage broker to ensure that you’re aware of your options here.

The most common guarantors are parents, but other close family members like siblings or grandparents can also act as guarantors. Some lenders may even accept close friends, although this is less common. The main requirement is that the guarantor must be someone who trusts you and is willing to take on the financial responsibility.

Being a guarantor is a significant commitment. As a guarantor, they are essentially agreeing to cover your loan if you are unable to repay it. This could mean they are responsible for making your mortgage payments or even risking their own property if you default. Therefore, it’s crucial for both you and your potential guarantor to fully understand the responsibilities and risks involved.

Risks and Considerations for Guarantors

The primary risk for a guarantor is the financial liability. If you fail to make your mortgage payments, the guarantor is required to step in and cover the repayments. This could potentially put their own financial situation at risk, especially if they have their own mortgage or other financial commitments.

Being a guarantor can also affect their credit score. If the loan goes into default, it can negatively impact the guarantor’s credit rating. Even if you make all your payments on time, the guarantor’s credit report will show that they are tied to your loan, which could affect their ability to secure credit for themselves in the future.

There are legal responsibilities involved in being a guarantor. They must understand that they are legally bound to the loan agreement. It’s advisable for both you and your potential guarantor to seek independent legal advice before entering into a guarantor loan agreement to ensure all parties fully understand the implications.

The Process of Setting Up a Guarantor Home Loan

The first step is to have an open and honest discussion with your potential guarantor. Make sure they understand the commitment they are making and feel comfortable with it. It’s also important to discuss your financial situation and plans to ensure you’re both on the same page.

Once you’ve had these discussions and decided to proceed, you’ll need to gather all the necessary documentation. This usually includes proof of income, identification, and details of the guarantor’s property. The lender will then assess the application and determine if both you and your guarantor meet their criteria.

The lender will likely require a valuation of the guarantor’s property to ensure it has sufficient equity. This valuation will help the lender determine the amount they are willing to lend you. Once the valuation is complete and everything is in order, the guarantor will sign a guarantee agreement, and the loan process can proceed.

Alternatives to Guarantor Home Loans

While guarantor home loans can be a great option, they’re not the only way to achieve homeownership. Here are a few alternatives you might consider:

Family Pledge Loans

A family pledge loan is similar to a guarantor loan, but instead of providing a guarantee, the family member pledges a portion of their own property as additional security. This can help you avoid Lenders Mortgage Insurance (LMI) and potentially secure better loan terms, much like a guarantor loan.

Co-Borrowing

Co-borrowing involves purchasing a property with another person, such as a partner, friend, or family member. Both parties are equally responsible for the mortgage repayments, and their combined incomes and assets are considered by the lender, which can increase borrowing power and make it easier to secure a loan.

Government Assistance Programs

There are several government assistance programs designed to help first-time homebuyers. These include the First Home Owner Grant (FHOG), which provides a one-off payment to assist with purchasing your first home, and the First Home Loan Deposit Scheme (FHLDS), which allows eligible first-home buyers to purchase a home with a deposit as low as 5% without paying LMI.

Myths and Misconceptions

Myth 1: Guarantor loans are only for first-time homebuyers.

While guarantor loans are popular among first-time buyers, they can also be used by other borrowers, such as those looking to upgrade their home or invest in property. The key is having a willing guarantor who meets the lender’s criteria.

Myth 2: Guarantors have to be wealthy.

Guarantors don’t necessarily have to be wealthy; they just need to have sufficient equity in their property. This means they may not need to have a lot of cash on hand but should have a property with enough value to provide the required security.

Myth 3: The guarantor’s property is at immediate risk.

The guarantor’s property is only at risk if the borrower defaults on the loan and the lender takes legal action. As long as the borrower makes their repayments on time, the guarantor’s property remains secure.

Conclusion

Guarantor home loans can be a helpful way to get your foot on the property ladder, especially if you’re struggling to save for a substantial deposit. By leveraging the equity in a guarantor’s property, you can potentially avoid costly Lenders Mortgage Insurance, secure better loan terms, and make homeownership a reality sooner than expected.

However, it’s crucial to understand the responsibilities and risks involved for both you and your guarantor. Open communication, thorough research, and seeking professional advice are key steps to ensuring a successful guarantor loan experience.

If you’re considering a guarantor home loan, consult with a mortgage broker or financial advisor to explore your options and get personalised advice. Remember, a guarantor loan is just one of many pathways to homeownership, so make sure you find the solution that best fits your needs and circumstances.

Ally Home Loans Pty Ltd is your ally in finance for all of your home loan, investment property, business and commercial financing needs. With our wide range of lending solutions, expertise in financial planning and investment strategies, and extensive experience in working with both Australian residents and Australian expats, we are your partners for your lending needs.

Book an obligation-free, complimentary consultation here today.

Ally Home Loans Pty Ltd is an Authorised Credit Representative (Credit Representative Number – 494608) of My Local Broker (Australian Credit License – 481374). Important Disclaimer: Your complete financial situation will need to be assessed before acceptance of any proposal or product.