What is a home loan guarantor?

A home loan or mortgage guarantor is someone (usually a close family member) who helps you secure a home loan by agreeing to use their property as security for your mortgage. The guarantor doesn’t provide any cash payments, instead offers a portion of their home equity to help you meet your deposit requirements. Having a guarantor on your home loan requires an agreement between you, your guarantor and the bank and is a legal commitment. This means your guarantor is responsible for the guaranteed portion of the loan if you’re unable to make your repayments. You can release your guarantor from the loan through an internal refinance process when you’re ready to take on the full risk of the loan, for example, after you’ve built up sufficient equity.

How does guarantor support work?

Guarantors will usually step in to cover the part of the borrower’s home loan that would otherwise require lender’s mortgage insurance (LMI). This is the insurance premium lenders charge borrowers when they’re unable to meet the 20% deposit requirement. The guaranteed amount will depend on your lender’s policies.

Benefits and risks

Benefits for borrowers

  • You may qualify for a home loan with a lower deposit. Instead of needing a full 20% deposit, you may need as little as 5% with the guarantor securing the remaining 15%.

  • You may avoid LMI and save thousands of dollars.

  • With a guarantor’s support, your overall risk is reduced which can improve your chances of getting a home loan approved.

  • Support from a guarantor can help you enter the home ownership market sooner instead of waiting to put together a big deposit.

Risks for guarantors

  • If the borrower defaults on payments, the guarantor is legally responsible for the guaranteed portion of the loan.

  • In case the loan is unpaid, and the bank takes action, it can impact the guarantor’s credit score.

  • A guarantor may reduce their borrowing capacity and reduce their ability to apply for a new loan.

  • If the borrower is unable to repay, the lender may repossess your guarantor’s secured asset.

Tips for borrowers and guarantors

For borrowers

  • Borrow responsibly: Make sure you can comfortably meet your repayments before asking for a guarantor.
  • Have a clear plan: Work on building equity in your home quickly (at least 20%) to avoid paying LMI. You can do this by making extra repayments. Property value appreciation will also help build equity, but the timeline can vary. Overall, building equity will help you release your guarantor from the home loan sooner. 
  • Consider a smaller guarantee: Some lenders allow limited guarantee (eg: 15% of the home’s value instead of the full loan). 
  • Factor in upfront and ongoing costs: Be sure to be aware of buying costs like stamp duty and legal fees. It’s important to run your numbers to know if you can afford the loan, as a guarantee doesn’t reduce your home loan repayments.

For guarantors

  • Understand the legal and financial risks: Consult a financial advisor and/or a lawyer before signing any agreements. 
  • Set boundaries: Negotiate a time frame for when your obligation as a guarantor should end. This could be when the borrower’s equity is at 20% or after a set period of consistent payments. Having a clear exit strategy will protect your financial security and wellbeing. 
  • Assess your financial situation: Evaluate your ability to cover the guaranteed portion if needed. It’s important that you’re able to meet your own financial goals without undue strain.
  • Explore other ways to help: Instead of being a guarantor, you could consider gifting money for a deposit, or co-purchasing a home. Every option has its own risks and benefits, so it's important to choose an approach that aligns with your financial situation.

Other ways to buy your first home

As a first home buyer, there are a number of supports you can explore to help you enter the housing market. These include government grants and schemes like the Home Guarantee Scheme, including the First Home Guarantee, Family Home Guarantee and the Regional Home Buyer Guarantee. Specific eligibility criteria will apply so be sure to review these. Another option to help you get on the property ladder quickly is to buy your first property using a strategy known as rentvesting. As with all financial decisions, it’s crucial to weigh up both the benefits and potential risks when considering rentvesting, as various factors often outside your control can ultimately determine its effectiveness.

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The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, financial and taxation advice before acting on any information in this article.

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