Guarantor Home Loan

One option for people who are unable to save enough of a deposit is to use a guarantor for their home loan. For example, say James has only saved a 5% deposit. Let’s also say James’s parents have paid off their home. If James’s parents pledge the other 15% of the deposit, he then has a 20% deposit.

The purpose of this article is to give you some background on guarantor home loans as well as some of the pros and cons. I’ll then show you the one situation where I’m comfortable doing a guarantor home loan with a client.

Best case vs worst case scenario

Best case

James’s parents go guarantor on his home loan. James saves thousands of dollars in lenders mortgage insurance (LMI). He has saved thousands in LMI because he had a full 20% deposit instead of only a 5% deposit.

A few years later, James has paid off a proportion of his home loan. Jame’s parents no longer have any responsibility toward their sons mortgage. James saved thousands in LMI.

Worst case

James’s parents go guarantor on his home loan, which he couldn’t afford by himself. A few years later, James’s situation has changed. He can no longer afford his mortgage repayments and defaults on his loan.
The lender sells James’s house to recover the money owed. The proceeds from the sale are not enough to cover the outstanding loan amount. The lender now asks James’s parents to provide the guarantee amount. If James’s parents can’t come up with the money, the lender will force the sale of their home too.

How does a guarantor for a home loan work?

James’s parents house:

Value: $900,000

Mortgage: $0

James’s situation:

Wants to buy a house for $500,000 in Victoria as a first time home buyer.

Has a deposit of $47,000 (which covers the 5% deposit plus lenders mortgage insurance of roughly $18,000)

How it works:

James’s parents provide a guarantee of $57,000 from the equity in their home. They don’t provide this cash. The guarantee means James can buy the property for $500,000. James doesn’t have to fork out $18,000 in lenders mortgage insurance.
When can James’s parents be free of being a guarantor? When the equity in James’s home reaches 20%. This could occur by paying off $57,000 from the home loan or from an increase in house prices.

What’s involved in being a guarantor?

Generally, the guarantor needs to have paid off their home. The guarantor could also use the equity in an investment property if it’s also mortgage free.
If the lender allows guarantor home loans, they will get a valuation. The guarantor will need to get independent legal advice. The lenders solicitor will prepare the necessary documents.

Can a retired home owner be a guarantor?

Yes, provided they have paid off their home, or an investment property. They will need to get legal advice and meet any other requirements set out by the lender.

Can someone go guarantor for a mortgage?

Not anyone can go guarantor. The main people are direct family members. Here’s a list of who can usually go guarantor:

  1. Parents
  2. Step parents
  3. Parents in law
  4. A spouse
  5. De-facto spouse
  6. Grandparents
  7. Siblings
  8. Children
  9. Brother in law
  10. Sister in law
  11. Legally appointed guardian

As a mortgage broker, do you have any requirements before helping a client with a guarantor loan?

I check whether the guarantor has the available cash on hand to cover the guarantee. For example, say a guarantor is pledging $50,000 from their home, I would want to see they have access to $50,000 in cash.
Let’s say the guarantor is on the aged pension. They own their home outright. They’ve got no other sources of lump sum cash.
In the above situation, I wouldn’t do the transaction. Even though it might save the borrower in LMI fees, the risk to the guarantor, in my mind, outweighs the benefit.
Does the guarantor have enough cash available to cover the limited guarantee? If they do, and they understand the risks, then I’d be happy to look at the situation as a broker.

Guarantor Home Loan Calculator

Comments are closed.