If you have a family member who owns property, they may be able to act as your guarantor to help you get a mortgage and buy a home more easily. With your family member as a guarantor, you won't need to save 10% to 20% of the property's purchase price, and you can avoid a hefty lenders mortgage insurance premium.
It also means that if you can't repay your mortgage, your guarantor may have to – so they need to be prepared to take on that risk. Here's how guarantor home loans work and how to find out if you're eligible.
How does a guarantor home loan work?
If you have a close family member with equity in their property (that means, they own all or most of the property), they can guarantee your deposit. You still need to borrow money from a lender and repay it, but the guarantor provides security.
And that's the catch: if you are unable to repay the mortgage, your guarantor may have to.
To minimise risks, a guarantor can guarantee only a portion of a loan, say 20%. Once the borrower has repaid 20% of the loan (or the property has increased in value and the borrower now has 20% equity), the guarantor's property is safe even if the borrower fails to repay the remaining 80%.
Guarantor mortgage scenario
Let's look at the process with an example guarantor scenario:
Jai and Rahda purchase a $600,000 apartment with a 5% deposit ($30,000).
They estimate their lenders mortgage insurance (LMI) premium using Finder's LMI calculator and are shocked to learn they'll need to pay $22,789.
Rahda's parents own their home outright. They agree to guarantee a further 15% ($90,000) of the property cost. This eliminates the LMI cost completely.
Jai and Rahda repay $100,000 of their loan principal over the next 5 years. Rahda's parents are no longer liable because the $90,000 they guaranteed has been repaid.
How much can I borrow with a guarantor?
With a guarantor, many lenders will let you borrow up to 100% of the value of a property. They may even allow up to 110%, which is enough to cover other costs like stamp duty and moving costs.
If you have a 5% deposit saved, having your parents guarantee a further 15% of the deposit means you can avoid paying LMI.
To find out if you're eligible for a guarantor home loan, first speak to your parents or whoever you're asking to guarantor your loan to confirm they're willing to be involved. You need to find out how much their property is worth and how much their loan is. This allows you to work out how much equity they have available.
For instance:
If their home is worth $700,000 and their loan is $450,000, they have $250,000 equity. This should be enough to guarantee part of your deposit.
If their home is worth $700,000 and their loan is $600,000, then they only have $100,000 equity – which may not be enough to assist.
The more equity they have, the greater the chance that the bank will accept them as a guarantor on your loan.
Once you've worked out that your guarantor has enough equity to help you, approach your bank or lender and see what their specific loan criteria is. Some lenders may require borrowers to have at least 5% of a deposit in genuine savings, even with a guarantor.
Finder survey: How do people typically secure a low-deposit home loan?
Response
Female
Male
LMI
1.36%
0.58%
Government grant
1.19%
0.19%
Lender offer (E.g. essential worker loan,green energy loan)
0.85%
Guarantor
0.17%
0.39%
Other
0.34%
0.19%
Source: Finder survey by Pure Profile of 1112 Australians, December 2023
Who can act as a guarantor?
Some lenders only accept parents as guarantors while others accept close relatives. Every lender has different requirements, but the following criteria usually apply:
Finances and credit. A guarantor needs equity in their property, a stable income and a good credit rating.
Residency. Lenders generally want a guarantor to be an Australian citizen or permanent resident.
Age guidelines. A guarantor must be over 18 and typically under 65.
Risks and benefits of a guarantor mortgage
Benefits
Get into the property market faster. Once you're in the market and paying off your loan, you can build up equity if the property grows in value. If you spend more time saving up a 20% deposit without a guarantor, the property prices can increase, meaning you need to save more.
Avoid paying LMI.Lenders mortgage insurance can add thousands of dollars to your home loan. With a guarantor loan, you can take this cost out of the equation.
Better chance of getting home loan approval. Having a guarantor will strengthen your home loan application and improve your odds of being approved.
Risks
The guarantor's property is at risk. If the borrower can't repay their loan and the guarantor can't make the repayments either, the guarantor's home could be repossessed by the bank.
You could be tied together for longer than expected. If the property market stagnates and you get no property price growth, it can take years and years to make enough payments to "release" the guarantor from the property.
Relationship strain. Mixing family and financial relationships can cause serious emotional strain. You should evaluate not only your finances but your relationship beforehand.
Thankfully, a guarantor is only liable to repay the amount they guarantee. Once that amount is repaid, the guarantor is released from further liability (the borrower, obviously, is not).
As long as you take the right steps, the Bank of Mum and Dad can be a fantastic option (as the benefits clearly show). But it is important to understand how to legally protect that financial gift, loan or advance so you can mitigate against the risks that could arise if something unplanned occurs.
Planning to act as guarantor for your child? Ask these questions first
Can I afford to go guarantor? Assess your financial situation realistically. While you shouldn't have to spend a cent, you do need to plan for a scenario where you suddenly become liable for the full amount you've guaranteed.
Can the borrower afford this loan? Try to assess the borrower's financial situation as clearly as possible. Don't make this judgement on instinct either: ask for hard evidence.
How is your relationship with the borrower? Just because you're close family doesn't mean you get along at the best of times. And with large sums of money involved even good relationships can become strained.
Have I sought professional advice? Get independent legal advice to make sure you fully understand the guarantor process.
How is a guarantor 'released' from a home loan?
Usually, you can apply to release the guarantor from the loan once the borrower has at least 20% equity in the property.
With 20% equity, you won't have to pay any LMI and your chances of getting the loan approved are strong. If your equity is less and your loan to value ratio is higher, say 85-90%, you're less likely to get your guarantor released until you have at least 20% equity.
To remove the guarantor, your lender will conduct a valuation on the property. Depending on the results of that valuation, you next step will either be to wait (if there's not enough equity yet), or apply with the lender to have the guarantor released.
Your bank may charge some administrative, government or settlement fees, which are usually around $300-500. If you are required to pay LMI (if your loan is above 80%), you'll need to fund this too.
What are my options if I can't get a guarantor for my home loan?
Having a parent who is able to guarantee your deposit is a privilege that many borrowers don't have. If you can't access a guarantor loan, here are some other options that might work:
A low deposit home loan.Low deposit home loans let you borrow up to 95%, but LMI can be very expensive. You can capitalise LMI costs, meaning you add the premiums into your mortgage and repay the premium as part of your monthly mortgage payment.
First Home Loan Deposit Scheme (FHLDS). Are you a first home buyer? If so, you can access the low deposit loan we mentioned, without having to pay a cent of LMI. Here's how the FHLDS works.
Family Home Guarantee. If you're a single parent, you may qualify for the Family Home Guarantee, which allows you to borrow with just a 2% deposit. There are strict eligibility criteria, though.
Richard Whitten is a money editor at Finder, and has been covering home loans, property and personal finance for 6+ years. He has written for Yahoo Finance, Money Magazine and Homely; and has appeared on various radio shows nationwide. He holds a Certificate IV in mortgage broking and finance (RG 206), a Tier 1 Generic Knowledge certification and a Tier 2 General Advice Deposit Products (RG 146) certification.
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I know Westpac permit Guarantor’s to use a fixed term instead of their property to enable their children to achieve 20% and therefore not be liable for LMI. NAB no longer provide this since the Banking Royal Commission. Do you have a list of Lenders that provide Guarantor Loans with the security as Fixed Terms instead of the property. It seems illogical to provide a property as security when it is worth ten times the security required. Hope you can help.
Banks and lenders change their policies frequently. At the moment, we don’t compile a list of banks that offer guarantor loans secured against savings/fixed income instead of property, because the demand for this information is quite small, and the policies change too frequently for us to keep on top of them.
Westpac is one of the few banks that offer this type of guarantee, but interestingly BankWest, which is owned by Westpac, won’t accept a term deposit and requires property as security.
You also generally need to refinance the loan to the bank your child is taking their loan out with, so there’s a lot to consider when considering becoming a guarantor.
We are selling an investment property which we have used as a guarantee for sons apartment which he is renting out while he works in Sydney.
His present bank require him to refinance and seem unwilling to use our home as equity. He has negative equity in the apartment due to recent alterations.
We want to transfer the guarantee onto our home which is paid for.
We have no outstanding debts. His
Are there any financial institutions that would accommodate this transfer.
Best if you can speak to a mortgage broker who can take into account your circumstances as well as your son’s. They know a wide range of lenders in the market who can give more options for your son.
We want to buy a house and looking into no deposit Lon with a guarantor but only my partner works $45k a year and I am on centrelink and we have two children. Would it be possible that any bank would lend to us we are looking at a house $160k
Thanks
Your ability to qualify for a home loan will depend on several factors; your combined income, assets, liabilities, credit history, and the lender’s eligibility criteria for a particular product.
Unfortunately, it can be difficult to qualify for a home loan if you’re receiving Centrelink benefits and if only one applicant is working as the lender may view you as a high-risk borrower. However, there are mortgage brokers who can help you find lenders, such as specialist or non-bank lenders, that are more likely to review your application.
When you apply for a no deposit or guarantor home loan, the application process can be more lengthy compared to a traditional home loan as the lender will need to assess the security and financial position of your guarantor. However, you can take measures to improve your chance of being approved. This may involve reducing your existing debts (e.g. credit cards) and making regular deposits into high-interest savings account to show the lender that you have financial discipline.
Lenders generally require the guarantor to be Australian citizens, although some lenders will allow them to be working or living overseas. If the loan is being secured with the equity of a property (and not cash), the property is usually required to be in Australia.
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Can my mother act as guarantor if she is 85 and owns her property outright?
Hi Janelle,
Generally, a guarantor must be over 18 and typically under 65.
Thanks,
Rebecca
I know Westpac permit Guarantor’s to use a fixed term instead of their property to enable their children to achieve 20% and therefore not be liable for LMI. NAB no longer provide this since the Banking Royal Commission. Do you have a list of Lenders that provide Guarantor Loans with the security as Fixed Terms instead of the property. It seems illogical to provide a property as security when it is worth ten times the security required. Hope you can help.
Hi Ray,
Banks and lenders change their policies frequently. At the moment, we don’t compile a list of banks that offer guarantor loans secured against savings/fixed income instead of property, because the demand for this information is quite small, and the policies change too frequently for us to keep on top of them.
Westpac is one of the few banks that offer this type of guarantee, but interestingly BankWest, which is owned by Westpac, won’t accept a term deposit and requires property as security.
You also generally need to refinance the loan to the bank your child is taking their loan out with, so there’s a lot to consider when considering becoming a guarantor.
Hope this helps!
Cheers,
Sarah
We are selling an investment property which we have used as a guarantee for sons apartment which he is renting out while he works in Sydney.
His present bank require him to refinance and seem unwilling to use our home as equity. He has negative equity in the apartment due to recent alterations.
We want to transfer the guarantee onto our home which is paid for.
We have no outstanding debts. His
Are there any financial institutions that would accommodate this transfer.
Hi Keith,
Thanks for reaching out.
Best if you can speak to a mortgage broker who can take into account your circumstances as well as your son’s. They know a wide range of lenders in the market who can give more options for your son.
Cheers,
May
We want to buy a house and looking into no deposit Lon with a guarantor but only my partner works $45k a year and I am on centrelink and we have two children. Would it be possible that any bank would lend to us we are looking at a house $160k
Thanks
Hi Rachael,
Thanks for getting in touch.
Your ability to qualify for a home loan will depend on several factors; your combined income, assets, liabilities, credit history, and the lender’s eligibility criteria for a particular product.
Unfortunately, it can be difficult to qualify for a home loan if you’re receiving Centrelink benefits and if only one applicant is working as the lender may view you as a high-risk borrower. However, there are mortgage brokers who can help you find lenders, such as specialist or non-bank lenders, that are more likely to review your application.
You can read more about no deposit home loans and you can also compare 95% loan-to-value (LVR) home loans. We also have an article about home loans for Centrelink recipients which may help you.
When you apply for a no deposit or guarantor home loan, the application process can be more lengthy compared to a traditional home loan as the lender will need to assess the security and financial position of your guarantor. However, you can take measures to improve your chance of being approved. This may involve reducing your existing debts (e.g. credit cards) and making regular deposits into high-interest savings account to show the lender that you have financial discipline.
All the best,
Belinda
Can I get a guarantor loan if the guarantor lives overseas and their equity is in the property they own overseas?
Hi Jade,
thanks for the question.
Lenders generally require the guarantor to be Australian citizens, although some lenders will allow them to be working or living overseas. If the loan is being secured with the equity of a property (and not cash), the property is usually required to be in Australia.
I hope this helps,
Marc.