Saving for a deposit is often the biggest hurdle to owning your own home. But what if you didn’t have to wait years to get into the market?
Saving for a deposit is often the biggest hurdle to owning your own home. But what if you didn’t have to wait years to get into the market?
Guarantor home loans are also commonly referred to as a ‘Family Pledge,’ ‘Security Guarantee,’ or ‘Family Guarantee.’ While the names differ, the core concept remains the same: using family equity to secure your future.
A guarantor loan lets a family member (usually a parent or close relative) use the equity in their own home to help secure yours. It’s a powerful way to get the keys to your first home sooner, often with little to no cash deposit required.
Here is how it helps you make it yours:
Essentially, your guarantor helps “top up” your deposit using their property equity. This means you might only need a small cash contribution (in some cases no deposit) to reach the 20% deposit threshold. By bridging this gap, you can qualify for your loan sooner and avoid the extra cost of lenders mortgage insurance (LMI).
Becoming a guarantor is a significant way to help a family member get into the market sooner. Generally, a guarantor is a family member who owns a property with sufficient equity.
It’s important to understand the commitment. As a guarantor, you are legally responsible for the portion of the loan you’ve guaranteed. If the borrower misses payments, you could be liable, and in extreme cases, the security property could be at risk. This is why we recommend all guarantors seek independent legal advice – we want both you and the borrower to feel confident and secure before moving forward.
It doesn’t have to be forever. A guarantor arrangement is a bridge, not a permanent tie. Once the borrower builds sufficient equity in their property, they can refinance to release the guarantor from the loan contract. We can also explore ‘limited guarantees’, where your liability is capped at a specific percentage.
No, you generally do not need the full 20% deposit in cash. A guarantor home loan uses your guarantor’s property equity as security to cover the deposit gap, which can significantly reduce or even eliminate the need for a large cash savings contribution.
However, many lenders will still look for a track record of ‘genuine savings’. This helps demonstrate to the lender that you have consistent savings habits and are capable of managing your mortgage repayments in the long term.
Typically, a guarantor is a close family member, most commonly a parent or legal guardian. Some lenders may consider other immediate family members (such as siblings or grandparents) under specific conditions. Guarantors must own property in Australia with sufficient equity and be in a strong financial position to support the guarantee.
Becoming a guarantor is a significant financial commitment. If you (the borrower) cannot meet your loan repayments, the guarantor is legally responsible for the guaranteed portion of the debt. This can impact the guarantor’s own credit score and, in a worst-case scenario, put their property at risk. We recommend all guarantors seek independent legal and financial advice before signing any agreement.
Yes. A guarantor is not necessarily tied to the loan for the full term. Once you have built up sufficient equity in your property, you can look to refinance and remove the guarantor from the contract.
In some cases, yes. By using a guarantor’s equity to cover the deposit gap, some lenders may allow you to borrow up to 100% of the property value (plus costs). The exact amount depends on your borrowing capacity, the guarantor’s available equity and the specific lender’s policies.
One of the hardest parts of buying a property can be saving the deposit. A guarantor home loan could give buyers the chance to enter the market years ahead of schedule by using a guarantor (generally a parent or close relative) to cover some or all of the deposit. As a result, buyers could potentially qualify for a home loan with cash savings equivalent to just 5% of the purchase price or even 0%.
A guarantor home loan is when property is purchased using someone else’s (a guarantor’s) assets as security. Guarantors contribute to the deposit not by paying cash but by using the equity in their property as security.
So, potentially, the buyer might make a 5% cash contribution and the guarantor a 15% equity contribution, for a combined 20% deposit; or in some cases the buyer might make a 0% cash contribution and the guarantor a 20% equity contribution. As a result, the buyer would be able to qualify for a home loan and would also avoid paying lenders mortgage insurance (which is generally charged when a borrower has less than a 20% deposit).
Many lenders will only accept guarantors who have a strong relationship with the buyer, such as a parent or guardian. They will also look at your credit history and ability to repay the loan should the buyer default.
For someone to act as a guarantor, they need to own a property and that property needs to have sufficient equity. So, as part of the process, the lender will conduct a valuation of the guarantor’s property.
The guarantor also needs to accept legal responsibility for the repayment of the loan. In other words, if the buyer fails to keep up with their mortgage repayments, the lender may chase the guarantor for payment; it’s even possible the lender may seize and sell the guarantor’s property to recoup its debt.
But that doesn’t mean the guarantor needs to be tied to the mortgage for the entire loan term. After a few years, once the buyer has built 20% equity in the property (potentially through a combination of paying down some of the mortgage and having the home rise in value), the buyer can refinance and remove the guarantor from the loan contract. Also, some guarantor loans can be set up as two loans, with the guarantor’s property used as security to cover only a percentage of the total amount borrowed (usually to cover the deposit).
Acting as a guarantor, therefore, involves risk, which is why guarantors should get legal advice before proceeding. It’s important that both parties – buyer and guarantor – have a clear understanding of their responsibilities under the arrangement, to avoid a breakdown in the relationship.
Some considerations include:
It’s important to note that being a guarantor is not for everybody and it’s certainly not the only solution that can be effective in helping people to enter the property market without a 20% deposit. Some of these other options include the buyers paying lenders mortgage insurance or applying for any government schemes that may be available.
As you can see, guarantor home loans can be a wonderful finance solution, but are not suitable for everyone. Reach out to your Loan Market broker if you would like to review your investment home loan.
