Guarantor Home Loans

Understanding How Guarantor Loans Operate

In the realm of guarantor loans, a trusted individual, often your parents, steps in to provide a guarantee for your home loan, secured by their property.

The primary objective is to expedite your entry into the property market. As you gradually repay a portion of your loan or your property’s value appreciates, you have the option to request the removal of the guarantee.

In recent years, guarantor loans have surged in popularity due to their cost-effectiveness compared to standard home loans. These loans empower you to make a property purchase without an upfront deposit. Moreover, some lenders now offer the flexibility to limit the extent of the guarantee.

Standard Home Loan Vs Guarantor Home Loan:

Standard Home Loan:

• Requires a typical deposit (10-20%).
• Property is the loan’s security.
• No guarantor involved.
• Potential for Lenders Mortgage Insurance.
• Loan amount based on income and credit.
• Variable interest rates.
• Requires time to save for a deposit.

Guarantor Home Loan:

• Allows low to no deposit.
• Guarantor’s property secures the loan.
• Involves a guarantor (e.g., parents).
• Often no Lenders Mortgage Insurance.
• Loan amount based on property value.
• Competitive interest rates.
• Speeds up homeownership, less need for deposit savings.

How Is The Mortgage Structured For The Guarantee?

The mortgage is structured to secure the loan using both the property being purchased and the guarantor’s property.

If a limited guarantee is used, the guarantor can reduce their exposure to your mortgage.

If your parents already have a home loan, your loan’s guarantee is secured as a second mortgage behind their existing loan, following a similar structure.

What’s The Limit Of The Guarantee?

For most guarantor loans, it’s advisable to limit the guarantee secured on the guarantor’s property. This means they are not liable for the entire loan amount but only a portion of it. The size of the limited guarantee is calculated as follows:

Limited Guarantee = (Loan Amount – (0.8 * Purchase Price)) / 0.75.

For instance, if you are purchasing a property for $500,000 and borrowing $525,000 to cover expenses like stamp duty, 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)

If this seems too complicated, you can use our guarantor loan calculator to do the math for you.

What Types Of Guarantees Are There?

1. Security Guarantee: In this type, the guarantor uses their real estate as additional security for your loan. If the guarantor already has a loan on their property, the bank can often take a second mortgage as security. This guarantee is commonly used when first-time home buyers with a strong credit history lack a deposit.
2. Security and Income Guarantee: This guarantee combines property security with an assessment of the guarantor’s income. Typically used when a parent helps their low-income or student child purchase their first property.
3. Family Guarantee / Parent Guarantee: In this scenario, the guarantor is a direct family member of the borrower. While often referred to as a “parental guarantee,” some lenders may consider guarantees from grandparents, siblings, or other family members on a case-by-case basis.
4. Limited Guarantee: With a limited guarantee, only a portion of the loan is guaranteed by the guarantor. This type is frequently used with security guarantees to reduce the liability on the guarantor’s property. Guarantees can be either limited or unlimited, depending on the guarantor’s preference and the lender’s criteria.