Guarantor home loans

What is a guarantor home loan?

A guarantor home loan lets a family member, almost always a parent, offer equity in their own property as extra security for your loan, instead of you needing a full cash deposit. The lender treats the combined security (your new property plus the guarantor's pledged equity) as covering the loan, which can let you borrow with a 0-10% cash deposit while avoiding Lenders Mortgage Insurance (LMI).

The guarantor doesn't hand over cash and doesn't co-own your property. They sign a guarantee against their own home, so their equity is what's genuinely at risk, not their savings.

How the guarantee is structured

Almost every Australian lender now uses a limited guarantee rather than an unlimited one. The guarantee is capped at whatever amount brings your effective loan-to-value ratio down to 80%, the threshold where LMI applies, not the full loan balance. If your loan defaults and the property sells for less than owed, the guarantor's liability is capped at that pledged amount, plus any interest and costs the loan agreement specifies.

Product names differ by lender but the mechanics are similar. The major banks and several regionals currently offer a version:

What the guarantor actually risks

The guarantor's property is real security. If you fall behind on repayments and the lender enforces the guarantee, the guarantor can be required to cover the guaranteed portion, and in a worst case the lender can pursue their property up to that capped amount. A guarantee also reduces the guarantor's own future borrowing capacity while it's in place, since lenders count it as a contingent liability against them.

ASIC's MoneySmart guidance is clear that going guarantor is a real financial and legal commitment, not a formality, and recommends the guarantor get independent legal advice before signing so they understand exactly what they're liable for.

• The guarantor's home, not their savings, is the security.
• Liability is capped under a limited guarantee, but the cap is still real money.
• It can reduce the guarantor's own borrowing capacity until released.
• Independent legal advice for the guarantor is standard practice, and some lenders require it.

When is a guarantor released?

Most lenders will consider releasing the guarantor once your loan balance, measured against a current valuation, falls to roughly 80% LVR or below, through a mix of your repayments and property value growth. You'll typically need to show the loan is serviceable without the guarantee before the lender agrees to release it. This is usually reviewed from around the two-year mark, but timing depends entirely on your repayment pace and how the property market moves in the meantime.

General information only, not personal advice. Guarantor arrangements vary by lender and by state, and the guarantor should get independent legal advice before signing. See ASIC MoneySmart's guarantor guidance below.

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