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Guarantor Home Loan
Guarantor Loans: Unlocking the "Bank of Mum andDad"
Breaking into the Australian property market can feel likean uphill battle, especially when trying to save for that elusive 20% deposit whilerenting. If you have the income to service a loan but lack the savings for a fulldeposit, a Guarantor Loan might be your solution.
At Mortgage Counsel, we help first-home buyers navigatethis process, turning the support of family into the keys to your new home.
What is a Guarantor Loan?
A Guarantor Loan allows a close family member (usuallyparents) to use the equity in their own property as additional security for yourhome loan.
In Australia, this is frequently referred to as tapping intothe "Bank of Mum and Dad”. However, unlike a cash gift, no money typicallychanges hands. Instead, your guarantor offers a portion of their home's value tosecure your mortgage, reducing the risk for the lender.
The Mechanics:
1. SecurityGuarantee: Your guarantor provides a limited guarantee (secured againsttheir property) to top up your deposit.
2. AvoidLMI: Because the lender views the loan as having a full 20% deposit (thanksto the guarantor), you generally avoid paying LMI.
3. TwoLoans (Optional): Often, the loan is split. One portion covers the 80% valueof the property (secured by your new home), and the smaller portion covers theremaining 20% plus costs (secured by the guarantor).
4. Releasing the Guarantee: Once you pay downthe guaranteed portion of the loan, or your property value increases enough to hold 20% equity on its own, you can apply to release the guarantor.
The Benefits for Buyers
• Enterthe Market Sooner: You don't have to wait years to save a massive deposit whileproperty prices potentially rise. You could enter the market with zerodeposit.
• SaveMoney: Avoid the "dead money" cost of Lenders Mortgage Insurance (LMI),which can save you between $10,000 and $30,000 depending on the purchase price.
• Better Rates: With a guarantor reducing the Loan-to-Value Ratio (LVR), you mayqualify for more competitive interest rates compared to standard low-deposit loans.
• Borrowf or additional costs: In some cases, having a guarantor allow you to borrowfor additional costs such as stamp duty, conveyancing etc. What this means isthat you could borrow up to 100 percent of the purchase price plus costs (stampduty and legal fees).
FAQ`s
Generally, lenders prefer immediatefamily members. This usually includes parents, but some lenders may accept siblings,grandparents, adult children or even ex-partners. Each lender has its ownrules. The guarantor must have sufficient equity in their property.
Yes. can borrow with no deposit using a guarantor.You could potentially borrow for costs such as stamp duty and legal costs.How much you can borrow depends upon your capacity to borrow which is determined by your income,expenses and liabilities.
The guarntors and still use their property to provide a guarantee,provided there is sufficient equity in the property.
No. You, the borrower, are fully responsiblefor the mortgage repayments. The guarantor is only called upon if you default onthe loan and the sale of the property doesn't cover the outstanding debt.
While guarantor loans are most common for Owner Occupied purchases, some lenders in Australia do allow guarantor arrangements for investment property purchases.
Yes-many lenders allow a limited guarantee, so the guarantor is onlyliable for a defined portion(rather than the full loan). This is often the preferred approach.
Yes! In fact, that is the goal. Once your property value hasincreased or you have paid down the loan enough so that you owe less than 80% ofthe property's value, you can apply to the bank to release the guarantor.
No.Guarantor loans use the guarantor's home equity as security.
You are responsible for repayments. If you default and the debt can't berecovered from you, the lender may pursue the guarantor for the guaranteed portion, which could put their property at risk.
Yes.Some lenders allow this.The gurantor can use the property to provide additional guarante,subject to there being equity in their property.
