Guarantor Home Loans: How Family Guarantees Work
A buyer may have enough income to manage a home loan but not yet have the deposit a lender would normally require. In that situation, a family guarantee may be worth exploring.
A guarantee is a serious legal and financial commitment for the family member providing it. The right structure should help the buyer without putting more of the guarantor’s property at risk than the lender requires.
What a guarantor home loan does
A family guarantee allows a lender to take additional security over an agreed portion of a family member’s property or, with some lenders, eligible cash security.
This may reduce the lender’s effective risk, help the buyer avoid or reduce Lenders Mortgage Insurance, or allow a purchase with a smaller saved deposit. The guarantor does not become an owner of the buyer’s property simply by providing a guarantee.
The point many families miss
A guarantee generally helps with the deposit or security gap. It does not create income or make the repayments affordable.
The buyer still needs to satisfy the lender’s assessment of income, living expenses, existing debts, credit history and ability to repay the full home loan. If the buyer cannot service the loan, additional family security will not fix that problem.
A simple $700,000 example
Assume a buyer purchases a home for $700,000 and contributes a 5% deposit of $35,000. Ignoring purchase costs for the moment, the buyer may need to borrow $665,000.
Eighty per cent of the purchase price is $560,000. Subject to the lender’s policy and valuation, a limited guarantee might cover roughly the $105,000 difference between the proposed loan and that 80% amount.
This is the useful part: the guarantor may not need to guarantee the entire $665,000 loan. The actual guarantee can be affected by purchase costs, the bank valuation, the buyer’s contribution and the lender’s policy, so the amount must be calculated for the specific application.
What could the guarantor be responsible for?
The agreed guaranteed amount if the borrower defaults
Interest, enforcement expenses or other amounts covered by the guarantee documents
A possible reduction in their own future borrowing capacity
Restrictions when selling or refinancing the property used as security
The risk of financial loss, including the possibility that secured property may be sold if the debt cannot otherwise be recovered
MoneySmart warns that going guarantor can affect a person’s ability to obtain their own loan and may put the asset used as security at risk. Every guarantor should obtain independent legal advice and consider independent financial advice before signing.
Questions the family should answer first
What exact dollar amount is being guaranteed?
Is the guarantee limited, or does it cover more than the deposit gap?
What happens if the buyer loses income or cannot make repayments?
Will the guarantee affect the guarantor’s retirement, refinancing or future plans?
What conditions must be met before the lender will release it?
Who will pay valuation, legal or loan variation costs?
How is a guarantor released?
A guarantee does not necessarily disappear automatically after a set number of years. The borrower or guarantor generally needs to request a release and the lender must approve it.
A lender may consider release after repayments, extra contributions or a suitable property valuation reduce the loan-to-value ratio to an acceptable level. The borrower still needs a satisfactory repayment history and must meet the lender’s requirements at that time. In some cases, refinancing may be considered.
Rising property values should never be treated as certain. Build the plan around repayments and realistic options, then treat any value increase as a possible bonus.
Alternatives worth comparing
The Australian Government 5% Deposit Scheme for an eligible buyer
A family gift instead of a guarantee
Saving a larger deposit or buying at a lower price
Eligible First Home Super Saver funds
A co-borrowing or shared ownership structure, with separate legal and tax advice
A family guarantee and the Government 5% Deposit Scheme solve the deposit problem in different ways. Comparing both before committing family property as security can prevent an unnecessary guarantee.
How the process usually works
Review the buyer: calculate borrowing capacity, deposit, purchase costs and a comfortable repayment range.
Review the guarantor: identify the proposed security, existing debt, available equity and future plans.
Compare structures: consider lender policy, the guarantee amount, costs and alternatives.
Obtain independent advice: the guarantor should use their own solicitor and understand the documents before signing.
Complete valuations and approval: the lender assesses both properties, the borrower and the proposed guarantee.
Plan the release: record what needs to happen before the guarantee can be removed and review the position over time.
Guarantor home loan FAQ
Do my parents have to give me cash?
Not necessarily. A guarantee may use part of the equity in an eligible property as additional security. The guarantor is not simply transferring that equity to the buyer.
Does the guarantor own part of my home?
No. Providing a guarantee alone does not make the guarantor a registered owner of the buyer’s property.
Can the guarantee be limited?
Many family guarantee structures allow the lender to limit the guarantee to an agreed amount, but lender policies and documents differ. The exact exposure must be confirmed before anyone signs.
Can the guarantor sell or refinance their home?
They may need the lender to release or restructure the guarantee first. This is why future plans should be discussed before the application is lodged.
What happens if the buyer cannot repay?
The lender may pursue the borrower and then enforce the guarantee in accordance with the loan and guarantee documents. The guarantor could be required to pay the guaranteed debt and may risk the property used as security.
Compare the options before offering family property
A guarantor arrangement can be useful, but it should not be the automatic answer. I can calculate the likely deposit gap, compare a limited family guarantee with other pathways and explain the lending side in plain English.
Call Lauren on 0458 053 943 or use the “Speak to us today” button to arrange a guarantor home loan discussion.