A guarantor home loan allows parents. Some lenders can consider guarantees from immediate family members such as siblings, grandparents, spouses, de facto partners or adult children.
Guarantor use the equity in their property as security for part or all of your mortgage. They could also ‘go guarantor’ by contributing cash to help you pay off the loan.
Your guarantor may choose to only guarantee a portion of the loan, which would mean once you had repaid that portion of the loan, they would be free from any risk to their property should you miss any repayments further down the track.
How much can I borrow?
How much you can borrow using a guarantor loan depends on what type of borrower you are:
First home buyers: 105% of the property value
Construction:105% of the total land value and cost of construction.
Refinancing: 100% of the property value.
Debt consolidation and purchase: 110% of the property value.
Investors:105% of the value of your investment property.
Technically, there is no maximum loan size.
What are the risks of being a guarantor?
On paper, the guarantor is ultimately liable for your home loan should you default.
There is a big fear that banks move quickly to sell the guarantor’s home to cover the remaining debt but the reality is that banks try everything to solve the problem before taking this drastic decision.
The reason is that there is often a significant process and cost involved in trying to sell the guarantor’s home.
What types of guarantees are there?
Security guarantee: With this type of guarantee the guarantor uses real estate that they own as additional security for your loan. If the guarantor already has a loan on their property, then, in most cases, the bank can take a second mortgage as security.
This type of guarantee is most often used when first home buyers with an excellent credit history are buying a home but have no deposit. The guarantor is also called an “equity guarantor” by some lenders.
Security and income guarantee: A security and income guarantor is most often a parent helping their son or daughter who is a student or who has a low income to buy their first property. The lender will use the parents’ property as additional security and will rely on the parents’ income to prove that the loan is affordable.
Family guarantee / parent guarantee: This is when the guarantor is directly related to the borrowers. Banks refer to this as a “parental guarantee”. Grandparents, siblings and other family members as guarantors are considered on a case by case basis.
Limited guarantee: A limited guarantee is where only part of the loan is guaranteed by the guarantor. This is most often used with security guarantors so as to reduce the potential liability secured on the guarantor’s property. Guarantees can either be limited or unlimited, depending on both the guarantor’s wishes and the lender’s requirements.