What Is a Guarantor Home Loan?
A guarantor home loan allows a borrower to use a family member's property as additional security or to support the loan application. In Australia, this is often used to help first home buyers enter the market with a smaller deposit.
How Does a Family Guarantee Work?
Typically, a parent or close relative offers their property as a security guarantee. This guarantee can reduce the lender's risk, which may allow the borrower to obtain a higher loan-to-value ratio (LVR) or avoid paying lender's mortgage insurance (LMI). The guarantor does not usually provide cash but pledges their asset as security.
When Can a Guarantor Be Removed?
One common goal is to remove the guarantor once the borrower's financial position improves. This can occur when the borrower has built sufficient equity in the property, usually by paying down the loan or because of property value growth. At that point, the lender may agree to release the guarantee, often subject to reassessment of the borrower's repayments and LVR.
Practical Considerations
- The guarantee is a serious financial commitment for the family member, as they may be liable if the borrower defaults.
- The lender will assess both the borrower and guarantor's financials.
- Removal of the guarantee typically requires the borrower to meet the lender's criteria for sole borrowing capacity.
- It is advisable to keep records of the loan and any changes to the property's value.
Why Use a Guarantor Loan?
For many first home buyers, a guarantor loan can be a practical way to get into the market without a 20% deposit. It can also help avoid the cost of LMI, which can be substantial. However, it is important to understand the obligations and the path to release the guarantee.
What to Discuss with a Broker
If you are considering a guarantor home loan, a mortgage broker can help you understand your options and the process of removing the guarantee. They can also guide you through the lender's requirements and help you plan to eventually release the guarantor.