Guarantor home loans: What are they and how can I apply?

Family looking at computer screen.

With property prices around Australia skyrocketing and the cost of living going up too, saving up a deposit for a home seems to be getting harder by the day. 

One option available to first home buyers is to have a family member act as guarantor on your loan. While many lenders are happy to accommodate this type of arrangement, it’s important that both parties understand the risks.

Guarantor meaning: what is a guarantor?

A home loan guarantor is someone who agrees to pay your debt in the event that you as a borrower default on your loan obligations. Your guarantor needs to be a homeowner themselves, as the equity in their property will be used as security for your loan.

Generally most banks will only allow parental guarantees, though there are some cases where other immediate family members like grandparents, siblings and de facto partners will be considered.

How do guarantor home loans work?

If you are a first home buyer who hasn’t saved up a deposit of 20%, you can ask your parents or a family member to be a guarantor on your loan. This involves using the equity they hold in their property as security for a portion of your home loan.

The amount that is secured is up to the guarantor and can be anywhere between 5% and 100% of the loan amount.

Whether it’s your parents or a close family member helping you out, it’s essential that they get independent advice from a solicitor and accountant/financial advisor to make sure they fully understand what’s expected of them as a guarantor.

Example of a guarantor loan

Nathan has just landed his first full time job and is on a salary of $50,000 per annum. Mozo’s borrowing calculator shows he could afford to borrow up to $300,000 and Nathan knows he can comfortably meet the ongoing repayments with his current job. The only problem is that he’s only saved up a 5% deposit. 

Eager to get into the property market, Nathan asks his parents to go guarantor on the remaining 15%. This would give him an LVR of 80%, which allows him to avoid paying for lenders mortgage insurance (more on this later).

What’s the difference between a co-borrower and a guarantor?

If you become a co-borrower — also called a joint applicant — on a home loan you will be legally responsible for the loan until it is repaid in full. 

It’s common for couples to be joint applicants on a home loan but sometimes friends or family members decide to go down this route as well. 

When assessing your serviceability, the bank or lender will take both sets of income, assets and liabilities into account to determine the total amount you are eligible to borrow.

In contrast, a guarantor home loan helps you secure a home loan by putting up a portion of your parents’ or family member’s property as security. This guarantee can be released without the full loan being repaid.

How much can a guarantor home loan save me?

By getting your parents or a family member to become a home loan guarantor, you can bypass saving up a large deposit.

You can also avoid the cost of lenders mortgage insurance (LMI), which borrowers are typically required to purchase when they don’t have the requisite 20% deposit for a loan. This protects the lender in case you're unable to service your mortgage.

What are the risks of a guarantor home loan?

The main risk involved is that the guarantor is liable if you’re unable to meet your repayments. 

In the worst case scenario, if you default on the loan and the bank can’t recover their loss in full when selling your property, they could potentially go after your parents’ property as a last resort.

For this reason, banks generally prefer investment properties to be used as security rather than the family home. 

Scenario: The company Nathan is working for undergoes a major restructuring and he is made redundant. If Nathan cannot find another job and defaults on his home loan, the bank could then seize his property to recover their loss. 

If the bank can’t get back their money in full, his parents’ home could be sold to cover the shortfall. 

However, keep in mind the bank can only retrieve the 15% portion that Nathan’s parent’s secured his home loan with. That’s why if your parents are considering guaranteeing your home loan, it’s always better for them to secure the loan with a small portion of their home.

Tips for taking out a guarantor loan

Taking out a guarantor loan can be risky business, but there are things you can do to help things go smoothly for both you and your guarantor. These include:

1. Calculate your repayments

While a parental guarantee may mean you can get into the property game earlier, you’ll need to be confident you can afford the monthly repayments. Use our repayments calculator to make sure you won’t be stretching yourself too thin.

2. Ensure you can afford a rate rise

Have you thought about whether you could afford your ongoing repayments if your lender was to increase rates in the future? You can use our rate change calculator, to see how much a rate lift could affect you.

3. Keep up a good savings habit

While having a guarantor can boost your chances of being approved for a home loan, your bank will still insist on combing through your finances to determine how much you can comfortably afford to pay.

Along with evidence of genuine savings, they will want to see you can be responsible with your spending and capable of paying off debts in time. If your last few bank statements can show this, it’s a surefire way to get in your bank’s good books.

4. Take out mortgage protection insurance

Mortgage protection insurance covers you if you’re unable to work and cannot make your repayments. Unlike lenders mortgage insurance, m, by paying your repayments for a set period of time for you.

For more tips for purchasing your first home, browse our in depth first home buyers guide. And if you're ready to start comparing the different loans available for first home buyers, head over to our first home loans comparison table.

Home loan comparisons on Mozo - last updated 9 August 2022

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* WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for $150,000 over 25 years.

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