Guarantor Home Loan in Australia: Everything You Need to Know
Have you been thinking about a guarantor home loan in Australia? If so, you’re certainly not alone. Data shows that guarantor loans increased by 71% in the 6 years leading up to 2021, with no indication that this upward trajectory will change any time soon. This means that the so-called “Bank of Mum and Dad” is now the 9th biggest lender in Australia, financing around $35 billion worth of loans. Despite this, many first home buyers remain unsure about what exactly is involved in obtaining a guarantor mortgage. Additionally, borrowers and their guarantors often want to know more about how long does a guarantor stay on a mortgage. Is this a 30-year commitment, or something more short-term?
What Should I Know About a Guarantor Home Loan in Australia?
The Brisbane housing market grew enormously off the back of the COVID-19 pandemic, with surging interstate migration pushing house prices up by 42.7% in some areas. While this peak dropped off in the wake of interest rate rises, property prices are once again steadily climbing. As a result, some Brisbane first home buyers are finding it difficult to come up with a suitable deposit for a mortgage. In this situation, a guarantor home loan can be a great option to explore with an experienced mortgage broker.
Guarantor Mortgage Definition: What is a Guarantor Home Loan?
Guarantor loans are offered by lenders who are concerned about a borrower’s ability to repay a mortgage. A guarantor loan could also be useful in cases where the borrower does not have enough money saved up for the deposit. A simple guarantor mortgage definition is a home loan for which both the borrower and their guarantor — a third party who agrees to pay back the loan if the borrower defaults or can no longer pay it — are liable. Through a guarantor home loan, a borrower may be able to pay a smaller deposit and avoid having to pay for Lenders Mortgage Insurance (LMI).
FAQs About Guarantor Home Loans in Australia
1. What is a guarantor? A guarantor is a third-party who agrees to take on the responsibility of repaying the home loan if the person purchasing the property defaults on the loan. The guarantor offers their assets or income as security to support the borrower’s application for a home loan. Being someone’s guarantor comes with serious responsibilities, so it’s a good idea to talk to an experienced broker before committing as a guarantor.
2. How long does a guarantor stay on a mortgage? On paper, the guarantor remains on the mortgage until it is discharged. However, the terms of how long a guarantor stays on a mortgage can be modified through refinancing. Guarantors usually agree to stay on the mortgage for at least 2 to 5 years, depending on how quickly the borrower is paying down the loan or how fast the property value increases. Most lenders allow for a change in how long a guarantor stays on a mortgage if:
- Repayments in the past 6 months have been made on time.
- The borrower’s credit history, income, and other financial aspects meet the lender’s policy.
- The loan-to-value ratio (LVR) is less than 80% (to avoid having to pay for LMI).
3. Who can be a guarantor on a mortgage? Individual lenders may have additional requirements, but at a minimum, a guarantor should:
- Be a citizen or permanent resident of Australia.
- Be between the ages of 18 and 65 (few lenders allow seniors to be guarantors).
- Have a good (personal) credit rating.
- Have equity in their property and/or a stable income.
4. What are the most common types of guarantor home loans in Australia? The most common guarantor home loans in Australia are:
- Security guarantee: This type of guarantor mortgage is most often used with first home buyers who have good credit histories, but no deposit. The guarantor home loan is being secured not only by the property being bought but also by the guarantor’s property. If the guarantor already has a loan against their property, the lender usually takes a second mortgage as security.
- Family guarantee: As the name suggests, guarantors are usually family members (most often, parents). If the lender uses the guarantors’ property as extra security, as well as their income as proof that the borrower can afford the loan, it is also known as a Security and Income guarantee.
- Limited guarantee: Not every guarantor is willing to secure the entire amount of the mortgage (called an unlimited guarantee). A limited guarantee reduces the guarantor’s liability so that they’re only guaranteeing a portion of the loan.
5. What are the benefits of guarantor loans? There are a number of benefits of guarantor loans, including:
- The ability for borrowers with limited or poor credit history to still obtain credit.
- Access to more favourable interest rates.
- Potential to borrow larger amounts.
- Opportunity to build or repair credit history.
- The prospect of more flexible loan terms.
6. What are the risks for guarantors? Despite these benefits for the borrower, it’s important to also understand the responsibilities and potential risks for guarantors. These may include:
- The guarantor is legally bound to repay the loan if the borrower defaults, which could result in financial hardship.
- If the guarantor cannot repay the loan, the lender may take legal action to recover the debt.
- The guarantor’s credit score could be negatively affected if they are required to make loan payments if the loan defaults.
- There are also certain risks for guarantors that apply even if the borrower doesn’t default. For example, the guarantor’s financial resources will be tied up, limiting their ability to obtain credit for their own needs.
7. What is the alternative to guarantor loans? If you don’t have access to a guarantor or would rather not involve a guarantor in your property purchase then there are other options available, such as:
- Save for a larger deposit to avoid paying Lenders Mortgage Insurance. This may be possible with the assistance of the First Home Super Saver Scheme (FHSSS).
- First home buyers may be eligible for government grants or schemes designed to help them purchase a property.
- You may be eligible for a low-deposit home loan that requires a smaller deposit compared to traditional home loans.
- A shared ownership arrangement may allow you to buy your first home in partnership with friends or family members (making the purchase more affordable for everyone involved).
Have You Got More Questions About Guarantor Loans in Australia?
If you’re looking for more information about guarantor loans in Australia then an experienced mortgage broker can help. At North Brisbane Home Loans, we’re happy to answer all of your questions about guarantor mortgages and owning property in Brisbane. Contact us today to find out what options will best suit your home-buying needs.