Guarantor Home Loan: How Parental Guarantee Can Help You Buy Your First Home

Are you a first home buyer struggling to save up a decent deposit? You’ve switched to op shops, you cancelled your gym membership, and it’s been 6 months since you enjoyed an avocado-on-toast brunch at your local café. Despite this, you still feel like you’re light years away from saving a 20% house deposit. If this describes your current situation, you’re not alone. 

According to one recent news report, it will now take a first home buyer 16 years to save a 20% deposit for an average-priced house in Australia. Fortunately, there’s good news. A guarantor home loan could help you kickstart your homeowner’s journey much sooner.

What Is a Guarantor?

A guarantor is a person who offers some of their property equity as a guarantee on the borrower’s mortgage. Essentially, they’re vouching for the borrower’s capacity to make the needed mortgage repayments and are offering their own property as collateral. 

A guarantor could be your parents (known as a parental guarantee), family, spouse or anyone deemed eligible as per the lender’s criteria. The equity in their property can then serve as your deposit and security.

What Is a Guarantor Home Loan?

A guarantor loan is a mortgage product offered to borrowers who have less than 20% of the purchase price saved as a deposit. The guarantor acts as a third party who agrees to pay back the mortgage should the borrower default or become unable to pay. 

Because the guarantor is accepting all the risk, the lender will approve the loan without requiring Lenders Mortgage Insurance (LMI). Guarantor loans in Australia have recently become very popular, increasing by 71% in the six years leading up to 2021.

How Does a Guarantor Loan Work?

With a guarantor home loan, the borrower is primarily responsible for making monthly repayments. However, should the borrower fail to make repayments, the guarantor becomes liable for up to the full amount of the home loan. They will take over the payments and become legally responsible for it.

For instance: you only have a 10% deposit for a home loan. But your parents own their own home and have built up significant equity over the years. Your parents can offer the extra 10% from their equity as a form of security. 

The lender will accept the 10% equity, coupled with your 10% cash deposit and view this as a complete 20% deposit. Because you now have a 20% deposit, you can avoid paying thousands of dollars extra for Lenders Mortgage Insurance. But if you’re unable to make your repayments, your parents will be legally required to step in and pay them for you.

Who Can Be a Guarantor for a Home Loan?

Who you can use as your home loan guarantor will vary depending on the lender. While most lenders allow for immediate family members (i.e., parents and spouse), others may also accept extended family members. 

This could include in-laws, grandparents, siblings and even an ex-spouse, as long as they fit the lender’s criteria. In some cases, a close friend may also be considered as a suitable guarantor.

What Are the Most Common Guarantor Mortgage Arrangements?

There are several different kinds of guarantor home loans available to first home buyers. The most common arrangements include:

• Parental Guarantee: Also known as a ‘Family Guarantee’, this is when a family member (usually a parent) acts as guarantor. They can help increase your borrowing power by reducing your loan-to-value ratio (LVR) to under 80%, so you don’t have to pay Lenders Mortgage Insurance (LMI). They can choose to pay cash or use equity. 
• Security Guarantee: This is the most common type of guarantor loan in Australia. With a security guarantee, the guarantor is legally required to meet the obligations of the loan if the borrower can’t do so. The lender will typically take out a mortgage (or second mortgage) on the guarantor’s property until the loan is repaid.
• Limited Guarantee: With this arrangement, the guarantor reduces their liability by only guaranteeing part of the borrower’s loan. For example, the guarantor may offer to cover the 20% deposit only. Once 20% of the home loan has been repaid, the guarantor is no longer liable.

What are the Benefits of Guarantor Loans?

There are some fantastic benefits for first home buyers who are eligible for a guarantor mortgage, such as:

1. You won’t have to save up such a large deposit.
2. Avoid paying Lenders Mortgage Insurance (LMI).
3. Improve your borrowing capacity.
4. Flexible guarantor arrangements to suit the needs of the borrower and guarantor.

However, as with any major financial decision, it’s important to carefully weigh up the pros and cons. The best way to do this is by consulting with an experienced mortgage broker.

What are the Eligibility Criteria for a Guarantor Loan?

Most lenders will only accept family members as guarantors on a home loan. Additionally, your chosen guarantor must comply with the guarantor mortgage requirements in Australia. This typically means they will need:

• To be between 18-65 years old.
• Have a good credit score.
• Own property in Australia.
• Have sufficient equity in their property.
• Have a stable income.
• Be a citizen or permanent resident of Australia.

If a guarantor has a low credit score or can’t demonstrate a stable income, they could have their application rejected, despite having sufficient equity. This is just one of the reasons why it’s a good idea to talk to a broker before approaching a lender about a guarantor loan.  

How Long Does a Guarantor Stay on a Mortgage?

Generally speaking, there is no set time limit on a guarantor home loan, and the guarantor will remain on the mortgage until it is discharged. With a limited guarantee loan, the guarantor will be free of liability as soon as the predetermined value (usually 20%) has been repaid.

However, there are alternative options available for guarantors who would prefer not to stay on the loan indefinitely. After 2-5 years, a first home buyer may be in a good position to refinance their home loan. The parental guarantee can then be removed as part of the refinancing process.

Are There Alternative Ways Parents Can Assist?

Besides acting as a guarantor, there are other ways that parents can assist their adult children with buying their first home, such as:

• Gifting money which can be used as a deposit.
• Offering a cash loan.
• Allowing them to live in the family home rent-free while they save for a deposit.
• Purchasing and co-owning a property together.

Here’s more information about Guarantor Loans from a mortgage expert:

Talk to a Mortgage Broker About Your Guarantor Home Loan

If your parents are able and willing to help you get a foot on the property ladder, there’s no time to lose. An experienced mortgage broker can answer all your questions, discuss eligibility criteria and advise which lenders offer the most competitive guarantor loans for first home buyers.

At ZEP Finance, we understand the unique challenges facing first home buyers. That’s why we’re committed to helping borrowers obtain the right guarantor home loan to suit their financial situation. To get started on your home-buying journey, contact the friendly team of brokers at ZEP Finance today.