In the complex landscape of real estate financing, first time homebuyers often encounter obstacles when trying to secure a mortgage independently. Enter the realm of guarantor home loans, a financial tool that has proven invaluable for many Australians aspiring to own their first home.

With Australian property prices soaring over the past number of years, it is becoming increasingly difficult for Aussie’s to save the required deposit to kickstart their first home buying journey. This is where a guarantor can prove to be a valuable asset.

In this blog post, I’ll delve into the intricacies of guarantor home loans, unravelling the concept, understanding its mechanics, and providing a roadmap for those considering this financial strategy to get their first step onto the property ladder.

Understanding Guarantor Home Loans: A Brief Overview

A guarantor home loan is a financial arrangement where a third party—typically a family member, often parents —pledges their assets or equity to support the borrower in securing a mortgage. This commitment provides additional security for the lender, increasing the borrower’s chances of approval, and often allows the homebuyer to access more favourable loan terms, including lower interest rates and reduced deposit requirements.

How a Guarantor is Used in a Mortgage Loan Scenario

In a guarantor home loan scenario, the guarantor offers a portion of their property’s equity as collateral, effectively vouching for the borrower’s ability to meet the (typically required) 20% deposit obligations. This additional security minimizes the lender’s risk, making it more feasible for the borrower to qualify for a home loan. The guarantor’s property or assets serve as a guarantee that, in the event the borrower defaults on the loan, the lender can recover the owed amount by tapping into the equity provided by the guarantor.

Case Study Example : John Uses His Parents as Guarantors for a Sydney Unit Purchase

John wants to purchase a Sydney unit for $1,200,000 (and can borrow that amount), and his parents have a home worth $2,800,000. John will take out two separate loans: one for $960,000 on the unit he is purchasing (80% of the property’s value), and a second for $240,000 which is secured by his parents’ home (20% of the property’s value). This second loan is called a limited guarantee.

Effectively, John is using the equity in his parents’ home as his unit deposit, rather than paying any deposit himself. John also avoids paying Lenders Mortgage Insurance (LMI) as he is providing a 20% deposit for the property’s purchase via his parents being guarantors for the deposit loan.

Releasing a Guarantor: Navigating the Path to Independence

Releasing a guarantor from a home loan is a significant milestone for both the borrower and the guarantor. Typically, this can be achieved through a process known as ‘guarantee removal’ or ‘guarantor release.’  The release is contingent on the borrower completely paying off the second loan.

How does one pay off the second loan? This can be achieved via extra repayments to pay off the loan sooner. However, in Sydney, the second loan is generally paid off via the purchased property increasing in value to the point where 80% of its value absorbs the second loan balance. The timeline for this second scenario is generally within 5 years of property ownership.

Top 4 Things to Remember When Using a Guarantor

1. Clear Communication: Open and transparent communication between the borrower and the guarantor is paramount. Establish clear expectations, discuss potential risks, and ensure both parties fully comprehend their roles and obligations in the guarantor arrangement.

2. Guarantor’s Financial Implications: Guarantors should be aware of the potential financial implications. While providing support can assist a loved one in securing a home, it involves risk. Guarantors need to understand that their assets may be at risk if the borrower defaults on the limited guarantee (20% deposit) loan.

3. Borrower’s Financial Implications: As the guarantor is providing a limited guarantee, the financial obligation of BOTH loans is on the borrower. Borrowers should be aware of the financial implications of both loans. Can you manage both loans if interest rates rise sharply? Defaulting on the second loan could lead to your guarantor losing their home. Defaulting on the first loan could lead to you losing your own home.

4. Not all Lenders Accept Guarantors: Be sure to discuss your need for a limited guarantee loan with your mortgage broker right from the start. As not all lenders will accept guarantors, your mortgage broker can review options on your behalf and source the right lender and loan for your needs.

Additional Resources for In-Depth Information

For further information on guarantor home loans, consider consulting resources such as Australian Securities and Investments Commission https://www.moneysmart.gov.au/ for comprehensive guides on home financing options and legal considerations.

Conclusion: Empowering First Home Buyers through Guarantor Home Loans

Guarantor home loans have emerged as a strategic financial tool, providing a lifeline for first-time homebuyers navigating the complexities of mortgage approvals. While the concept may seem intricate, the potential benefits, including reduced deposit requirements and improved loan terms, make it an attractive option for those seeking homeownership.

However, the decision to utilise a guarantor should not be taken lightly. Clear communication, a comprehensive understanding of the financial implications, and a commitment to responsible financial management are key to the success of this arrangement. With the right information and careful planning, guarantor home loans can serve as a stepping stone for Australians to achieve their dreams of owning a home.

If you’re a first home buyer wishing to learn more about guarantor loans and the property buying process in general, please feel free to reach out to me via support@kittyandmiles.com.au As a Buyers Advocate I’m here to assist you to get your first home.

Note: This article is intended for informational purposes only and does not constitute financial advice. Readers are encouraged to seek professional advice tailored to their specific circumstances.