What is a guarantor loan?

As you can figure out with a name, Guarantor home loans are the loans that include a guarantor in the application. As banks have low risk, therefore clients are eligible to borrow 100% of the purchase price and in some cases up to 110% of the property purchase price.

The following categories decide borrowing power:

First home buyers: Can borrow a maximum of 105% of the property value

Construction: Construction applications can borrow up to 105 % of the total project value. ie. Total of land value plus the cost of construction.

Refinance: Up to 100% of the property valuation.

Debt consolidation: Normally 100% of the property value, but some lenders can provide 110% of the value.

Investment Purpose: Most of the lenders allow 100% of the value of the investment property.

Why Choose Guarantor Home Loans?

Guarantor loans have unique benefits to clients:

You can purchase a property without having a deposit.

Guarantor loans are low-risk loans to lenders so no LMI costs to clients.

Lenders offer competitive interest rates.

Lenders allow for debt consolidation.

The size of the guarantee can be used according to capacity.

Guarantor loans are only loans where clients can borrow with no deposit with them.

How does guarantor loans work?

The guarantor is providing a guarantee to help you buy a property. The guarantee is a guarantor’s own property. So, a guarantor’s property is at risk if you fail to repay installments. Eg. your parents provide their own home as a guarantee so that you buy your property. The guarantee provided to banks actually is helping you purchase the property before you can be eligible on your own.

Guarantor loans are popular as

Interest rates are competitive
No deposit needed
Guarantee size can be tailored
A guarantee can be removed anytime soon the loan to value ration is acceptable by banks.

Guarantor loans and second home buyers

Lenders are fairer to first home buyers for a guarantor loan. The investment or second home possess more risk to lenders as they expect them to contribute more savings towards the loan.

Guarantor loans and genuine savings

Lenders do not need to see a genuine savings history when there is no LMI involved. However, for guarantor loans, lenders need to see your savings habits for the past three months. The reason is most of the time are young people who get into guarantor loans and have no good experience of savings. So if you are considering for a guarantor loan, be prepared for some regular savings. In some cases, the regular rent you paying on time can be considered as savings as well.

As discussed, there are young people involved and most of them have to study, change jobs and do various things before they get established. So it a risk to banks related to employment. All lenders have their own guidelines.

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Can I buy an investment property?

Lenders have their first preference for first home buyers. There are only a few lenders who provide investment loans without deposit. The reasons are:

More risk to the guarantor
More risk to banks
High LVR as no deposit is contributed.
High costs for banks in case of default.

However, some of the lenders do consider if the guarantor has strong financials compared to the loan amount to apply for.

Guarantee explained

The banks secure a loan by

Property being purchased
and the property owned by the guarantor.

Depending on the price of the property to be purchased, the guarantor can reduce their guarantee value to your mortgage.

So the risk to guarantor always stays there. Sooner you pay between 10% to 20% or according to bank guidelines, the guarantee can be removed from the loan

How much is the guarantee limited to?

A good broker will limit the size of guarantee to for the only portion which is needed rather than the entire property.

The size of the limited guarantee is calculated as follows:

Size of the guarantee = (Loan Amount – (0.8 * Purchase Price))/0.75.

For example if you are buying a property for $500,000 and are borrowing $525,000 to cover your expenses such as stamp duty then the calculation would be:

($525,000 loan amount – (0.8 * $500,000 purchase price))/0.75
$125,000/0.75 = A limited guarantee of $166,700 (rounded to the nearest $100)

Is this all too complicated? Just let our guarantor loan calculator figure it all out for you.

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.

Who can be a guarantor?

Most banks will only allow parental guarantees, that is, a guarantee from the borrower’s parents.

Some lenders can consider guarantees from immediate family members such as siblings, grandparents, spouses, de facto partners or adult children.

Check out the guarantor eligibility page for more information.

Are any Risks involved in being a guarantor?

Yes, there are certain risks involved when you agree to be liable for somebody’s loan. The common risks are

Banks will sell a guarantor’s property first.
Banks know they are more secured by guarantee so they won’t issue as many warnings in case of missing the repayments.
In case banks need to sell property, all the costs are to be paid by the guarantor.

Guarantor checklist

If you want to be guarantor, few factors can be taken care of such as:

Advise the borrower to borrow less amount as much they can rather than reaching the full borrowing capacity.
Limited guarantee to be applied rather than a full guarantee.
Only be liable if the borrower has savings habits
Make sure that borrower is serious about buying property rather than pursuing them to buy.

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Guarantor Home Loans