Getting your foot onto the property ladder can be a challenge, especially if you are a first-time buyer.
This is why home loan providers allow you to partner with a guarantor to provide the security they are looking for, which enables you to qualify for that all important deposit.
Read our guide to help you understand guarantor home loans, with answers to common questions like:
Let’s kick this off by defining what a guarantor loan is in more detail.
A guarantor home loan allows someone else - like your parents or someone close to you, to guarantee a portion of your loan.
They do this by putting up equity - normally a property they own - as security against the home loan. This helps reduce the overall risk of the home loan for the lender. By acting as a guarantor means they will be responsible for paying back the portion of the loan they have guaranteed - if you are unable to.
You should know that you may also come across a parent guarantor home loan, family security guarantee, family equity loans, family guarantee loan or family pledge loan. These are similar products, but the terms could vary depending on the home loan lender. An example of this are family equity loans, where a family member actually makes all/a portion of the repayments on a loan - rather than just putting up the equity or security on the loan.
The most common guarantors are family members, including parents, parents-in-law, stepparents, grandparents, a sibling or a legal guardian.
To act and qualify as a guarantor they will need to have:
If the guarantor has a mortgage on the property they are putting up for security the lender may require they refinance it with them - though this will depend on the individual lender.
Now let’s understand how these loans work, by using a practical example.
The easiest way of understanding how a guarantor home loan works is to look at a real world example.
The first thing to know is that you typically need a 20% deposit + purchase costs ( e.g. stamp duty) to buy a property. If you have saved less than this - say 10% - you are likely to have to pay lenders mortgage insurance (LMI). This is to cover the risk the lender takes on when they approve your home loan.
Having a guarantor means they can help you put up a 20% deposit, so you can qualify for the loan, purchase the property immediately and avoid paying LMI. Your guarantor must then provide security for this portion of the loan, and they are discharged as a guarantor when their portion of the loan is repaid.
Tip: If you have a larger deposit you could also qualify for a better interest rate.
Typically there is no different maximum loan size that applies to a guarantor home loan.
You can actually borrow up to 110% of the purchase price of a property with a guarantor home loan. This means you can borrow the entire purchase price plus other upfront purchase costs like stamp duty and conveyancing. If you have not been able to save for these extra costs this is a very useful feature of this type of loan. You can use our home deposit calculator to estimate the upfront costs associated with purchasing a property.
You - and the guarantor - will still be subject to standard borrowing capacity tests to ensure you can service or pay off the loan. Home loan providers take a number of factors into account when they assess your application, including all your monthly expenses, outgoings and debts against your monthly income. They need to feel comfortable that you can make the repayments based on your income, outgoings and lifestyle.
Tip: Use our online calculator to work out how much you could borrow - it's as easy as filling out a few personal details.
Anyone can apply for a guarantor home loan, though they are particularly popular with first home buyers who may not meet the borrowing criteria set by lenders, or who don’t want to wait to save for a deposit. This type of loan is also primarily designed for owner occupiers, and not for an investment property purchase.
Otherwise to qualify for a guarantor loan you - and the guarantor - will need to meet standard lending criteria, such as having a stable income and a good credit history.
Tip: You can check your credit score for free from any online credit score provider, usually within minutes. This consists of a record of the amount of money you’ve borrowed, how many credit applications you’ve made and if you pay on time.
The primary benefits of qualifying for a guarantor home loan is that you:
Like any financial product, you have to be aware of the inherent risks of this type of home loan.
There is risk inherent in many types of financial products, and guarantor loans are no exception, including that:
Tip: You - and your guarantor - should read and understand the full terms of the loan and seek independent legal and financial advice before signing it.
Like any financial agreement, a guarantor home loan is a serious commitment for both you and the guarantor, especially if you default.
Defaulting means not being able to meet your repayments.
This could happen if your circumstances change - like losing your job and income. The lender has the right to sell your property to recover the loan. If the sale price doesn’t cover the outstanding loan amount, the lender has the legal right to seek the limited guarantee amount from your guarantor.
Tip: If you get into financial difficulties you should contact your lender as soon as possible to discuss your current situation. It’s in their interest to help you work out a solution.
You can discharge a guarantor when your loan amount is up to 80% of the property value. This means when you have paid down the debt or the market value of the property has gone up. If your loan amount is greater than 80% you might still be able to discharge the guarantor but LMI would apply.
Wondering how to apply for your first home loan?
With Yard it's a simple, three step online application you can complete anytime, from any device.
Tell us about yourself: Securely share your personal financial details. We verify your identity, credit history and financials online.
Design your loan: Design the features of your loan to match what works best for you.
Get approved! When all of your details check out, we provide you with the decision on your loan!
We then settle your loan and take care of the rest so you secure your dream home asap!
Armed with this knowledge you should now be in a better position to decide if a guarantor home loan is right for you.
Have any questions about guarantor home loans? We’re here to help, and our local team are available to chat at a time that suits your schedule.