What is a guarantor home loan?

Guarantor loans are designed for those with a small deposit, or no deposit at all. A guarantor is a ‘third party’ to a home loan, they are typically either a parent or close family member who will use some of the equity in their own property secure a home loan for another person, usually a close family member.

Read our guide to LMI and how you could paying avoid it here.

How does a guarantor home loan work?

1. A guarantor allows the equity in their own property to be used as additional security for another borrower’s home loan. Their own equity value needs to be sufficient to cover 20% of the new property’s value.
2. The guarantor’s property (the guarantee) assists you, the borrower, in the payment of your deposit. The primary security for the home loan will be the new property, but the lender will also take a loan out over the guarantor’s property.
3. Signing a guarantee is a binding contract that may require the guarantor to pay the entire loan back if the borrower cannot, including additional fees like Lenders Mortgage Insurance and stamp duty. (Naturally the sale of the new property will allow for repayment of a substantial amount of the debt).
4. The lender will take a home loan out over the guarantor’s property, which will remain in place until the guarantee expires, or until it is removed.
5. The guarantor can be removed from the loan once the value of the guarantee has been paid off, or the value of the new home has increased sufficiently to meet with the bank’s lending policies, normally but not exclusively that the remaining loan balance(s) is not more than 80% of the increased value of the property.

How much can I borrow with a guarantor home loan?

You could potentially borrow up to 100% of a property’s value with a guarantor home loan.

Keep in mind that your guarantor is not regarded as a co-applicant on your loan, but their property is used as security and this means that your lender will hold the title for their property while they remain guarantors to the new loan.

If you default on your home loan repayments, your guarantor will also be liable to repay the funds up to the amount they guaranteed.