A guarantor can get you into the property market years sooner and help you save thousands on LMI.
If you're not able to save up a large deposit or want to avoid paying lenders mortgage insurance (LMI), a guarantor can help. To be eligible, you need a family member who owns a property and is willing to guarantee your deposit. This can be a risky option and isn't for every borrower, but in the right circumstances getting a guarantor can get you into the property market sooner.
Compare mortgage options below or read more about the details, benefits and risks of a guarantor mortgage.
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With the RACQ Bank Mortgage Saver Special Home Loan enjoy a home loan with no application or ongoing fees as well as a competitive interest rate. Borrow up to 95% of the property's value.
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- Comparison rate of 3.62% p.a.
- Application fee of $0
- Maximum LVR: 95%
- Minimum borrowing: $20,000
Compare home loans with guarantor options in the table below
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What's on this page?
A guarantor uses their property to provide security for someone else's mortgage. They guarantee part or all of your loan and you get to borrow (and repay) the money. If you can't repay the money your lender will recover the debt from your guarantor's property. This is why it's a risky option for the guarantor. Your debt becomes their problem if you default on the loan.
To minimise risks a guarantor can guarantee only a portion of a loan, say, 20%. Once the borrower has repaid 20% of the loan the guarantor is no longer responsible for the loan, meaning they're off the hook if the borrower defaults on the remaining 80%.
Some lenders only accept parents as guarantors while others accept relatives. Every lender has different requirements, but the following criteria usually apply:
- Finances. A guarantor needs equity in their property and a stable income to satisfy lenders.
- Credit. Your guarantor should have a good personal credit rating.
- Residency. Lenders generally want a guarantor to be an Australian citizen or permanent resident.
- Age. A guarantor must be over 18 and typically under 65. Few lenders are comfortable accepting retirees and older people as guarantors. There are exceptions to this, of course.
With the right guarantor, many lenders will let you borrow up to 100% of the value of a property or even slightly above that, up to 110%.
If you already have some money saved for a small deposit a guarantor loan can still be very helpful. If you have a 5% deposit saved you may have to borrow 95% of a property's value. Given that many loans have a maximum LVR of 80% you'd be liable for lender's mortgage insurance (LMI), a major additional cost.
Having a guarantor provide security for the remaining 15% of your deposit lets you get the loan and avoid that extra cost.
There are several benefits to guarantor loans, depending on your circumstances and financial goals. With a guarantor home loan you can:
- Get into the property market faster. Once you're in the market and paying off your loan you can build up equity and enjoy capital gains if the property grows in value. If you spend more months or years saving up for a full deposit without a guarantor the property might grow in value and you'd need to save even more.
- Avoid LMI. Lenders mortgage insurance can add thousands of dollars to your home loan. A guarantor loan takes this cost out of the equation.
- Get a better rate. There are loans for borrowers with small deposits but they often have higher interest rates as well as LMI. Using a guarantor can unlock better loans with more favourable rates.
- Improve your chance of getting approved. If the lender isn’t convinced that the borrower will be able to repay the loan, whether it’s because they lose their job, fall ill or are injured, then they are likely to require the signature of a guarantor. This way they have a backup so they can recoup their money if the borrower is no longer able or willing to make the payments. Thus, generally people with little to no credit history, low income borrowers or young people are often required to have a guarantor.
If you cannot make a mortgage repayment your guarantor's property might ultimately become the bank's property. This can be costly if the secured property is an investment. If the property is the family home it could be ruinous.
Guarantor loans are deeply personal and potentially risky. Financial strain can lead to relationship breakdowns and deep distress.
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).
John and Rachel's financial woes
John and Rachel purchase a $600,000 apartment with a 5% deposit ($30,000). Rachel's parents guarantee a further 15% ($90,000).
John and Rachel repay $150,000 of their loan over the next few years. Sadly, John loses his job and the couple struggle to make repayments. Thankfully Rachel's parents are no longer liable because the $90,000 they guaranteed has been repaid.
While Rachel's parents are off the hook they do have to make some adjustments: John and Rachel are forced to sell up and move back in with them!
Agreeing to act as guarantor is a serious step and you need to consider your position very carefully. Ask yourself the following questions:
- Can I afford to go guarantor? Assess your financial situation realistically. Plan out a scenario where you suddenly become liable for the full amount you've guaranteed. Could you afford to pay this amount? Ensure you can cover the monthly repayments without outside help before you commit.
- 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. If this causes a problem then going guarantor would be very unwise.
- How is your relationship with the borrower? Are you on good personal terms? 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 and financial advice to make sure you fully understand what this process entails and how it will affect your financial situation.
What information should be in guarantor loan contract?
You should get a copy of the loan contract from the bank or lender because it will provide you with important and accurate information such as:
- The size of the loan
- The rate of interest, fees and other costs
- Whether or not it is a secured loan, meaning whether or not the borrower had to offer an asset up as security, like a home or another type of property
- The timeframe in which the loan has to be paid off
- How much the monthly repayments are.
Co-buying a property
Co-buying, or co-borrowing, is somewhat similar to using a guarantor. But rather than having your parents guarantee your loan in the event you can't repay it, a co-borrowing arrangement means you are getting a loan with your parents.
Your lender will assess your parents' assets (and yours) including the equity in their home. This can make it easier to get finance, but you and your parents will both be liable to repay the entire loan. Ownership arrangements can also be complicated. You can learn more in our detailed guide to buying a house with your parents.
Unfortunately getting a guarantor is really the best way to get a mortgage without much of a deposit. But that doesn't mean you can't find creative ways to scrape together a 5% deposit. Use this guide on no deposit loan options to get a clearer idea of what you can do.