What Is a Guarantor Mortgage?

A Guarantor Provides Added Security for the Home Loan

With a guarantor loan, the borrower remains responsible for the regular loan repayments. The guarantor agrees to provide added security, often by allowing the lender to take a limited interest over part of the guarantor’s property. The guarantor’s property does not usually become part of the borrower’s home purchase, but it may be used as loan security if the borrower defaults. Depending on the lender and the loan structure, the guarantee may cover part of the loan rather than the entire loan amount. This is often known as a limited guarantee.

For example, a lender may look at the purchase price, the borrower’s house deposit and the amount of additional security available through the guarantor’s home equity. The exact loan amount and security requirements vary between lenders, so guarantor support does not mean every borrower will qualify for a particular home loan.

A Guarantor Mortgage May Reduce the Deposit Barrier

Saving a bigger deposit may take time, particularly for first home buyers trying to enter the housing market while property values and living costs change. A guarantor home loan may allow some borrowers to apply with a smaller deposit where the lender accepts additional security as part of the loan structure. This does not remove the need for the borrower to show that they may manage the repayments. The lender will still consider the borrower’s income, expenses, existing debts, credit history and overall financial situation before deciding whether to approve the loan.

A guarantor arrangement may also affect whether the borrower needs to pay lenders mortgage insurance. Lenders mortgage insurance, or LMI, generally protects the lender rather than the borrower when a loan has a higher loan amount compared with the property value. In some cases, sufficient guarantor security may mean lenders mortgage insurance LMI is not required, depending on the lender, total loan amount and structure of the guarantee.

The Guarantor Takes on a Genuine Financial Responsibility

A guarantor is not simply giving approval for a family member to borrow money. The guarantor may become legally responsible for the amount covered by the guarantee if the borrower defaults and the lender seeks repayment under the guarantee. If the borrower defaults, the lender may be able to recover money from the guarantor under the terms of the guarantee. Where the guarantor’s own home or another property is used as loan security, the guarantor’s property may be at risk if the guaranteed amount cannot be repaid.

A potential guarantor may wish to obtain independent legal advice before signing documents to understand the obligations and risks attached to the guarantee. Legal fees may apply, and a guarantee may affect the guarantor’s own borrowing power, credit report, credit history or ability to obtain another loan. This article is general information only and does not take into account your objectives, financial situation or needs. It is not personal advice. Lending criteria, interest rates, fees, loan features and government scheme rules may change and may vary between lenders.

The Guarantor Does Not Replace the Lender’s Assessment

A guarantor home loan may provide extra security, but it does not replace the lender’s assessment of the borrower. A lender will generally assess whether the borrower may manage the loan repayments and total loan alongside their income, expenses, existing debts and other financial commitments. The lender may review the borrower’s credit report, credit history, employment income, regular expenses, existing loans and other debts. Interest rates, loan features and the proposed repayment amount may also affect how the application is assessed.

The guarantor’s financial position is also relevant. A lender may look at the value of the guarantor’s property, any mortgage already secured against it and whether there is sufficient equity available to support the guarantee. Lenders may apply different eligibility criteria to guarantor loans, including requirements about whether the guarantor is an immediate family member and the security being offered.

Guarantor Support May Sometimes Be Removed Later

A guarantor does not necessarily remain attached to the home loan for the full loan term. In some cases, the borrower may later request release of the guarantee if the loan amount and property value provide sufficient equity under the lender’s criteria at that time. Whether a guarantee may be removed depends on lender assessment and may involve the remaining loan amount, current property value, repayment history and lending criteria at that time.

Extra repayments may reduce the loan balance sooner where the home loan allows them, although available features and any conditions depend on the particular loan. Refinancing may be another option in some situations if the borrower later meets lender eligibility criteria for a home loan without guarantor support. Any change remains subject to lender assessment, fees, interest rates and the borrower’s circumstances at the time.

Guarantor Loans Sit Alongside Other Home Buyer Options

A guarantor mortgage is only one possible way to manage a low deposit. Some first home buyers may be eligible for a government home guarantee or another home buyer scheme, depending on their circumstances and the eligibility criteria applying at the time. Available home loan options may depend on factors such as the borrower’s deposit, income, borrowing power, purchase price, property type and capacity to manage repayments. Stamp duty, legal fees and other home purchase costs may form part of the overall amount a home buyer may need to allow for alongside the house deposit.

A finance broker may help explain how a guarantor home loan may work across different lenders, what deposit requirements may apply and how the guarantee could affect the loan structure. A broker may help compare available home loan options, repayment features and lender requirements without assuming that a guarantor loan will suit every borrower.

Understanding the Full Arrangement Matters Before Applying

A guarantor mortgage may allow some home buyers to apply for a home loan sooner by using additional security provided through a family member’s property. It may be an option where the borrower has a small deposit but otherwise meets the lender’s eligibility criteria and assessment of their capacity to make repayments. However, guarantor support involves risk for the guarantor and does not guarantee loan approval, eligibility, lower interest rates, reduced repayments or any particular borrowing outcome. The borrower and guarantor may consider how much is being guaranteed, how the loan security works and what could happen if the borrower cannot make the loan repayments.

Eurobodalla Finance may explain how lenders may assess a guarantor home loan, compare available loan structures and discuss general deposit requirements, loan repayments and lending criteria that may apply.