Guarantor Loans

A guarantor does not necessarily guarantee the entire home loan. With many family guarantee structures, the guarantee is limited to an agreed portion of the borrowing, often supported by equity in the guarantor's property.

The amount required depends on the purchase price, the borrower's contribution, purchasing costs, the proposed loan and the lender's policy. The structure should be calculated for the individual transaction rather than assuming the guarantor needs to secure the whole debt.

A guarantor may reduce the amount of savings a borrower needs to contribute, and some lender structures can potentially support very high levels of borrowing.

However, a guarantor does not automatically mean you can purchase with no money of your own. You may still need funds for stamp duty where applicable, conveyancing, inspections, registration and other purchasing costs. Lender requirements also vary.

It is therefore better to calculate the total cash required to complete the purchase, not just the deposit.

Potentially. One of the common reasons for using a family guarantee is to provide additional security so that the lender's effective exposure against the purchased property can meet its requirements without Lenders Mortgage Insurance.

Whether LMI can be avoided depends on the lender, loan structure, property values and the amount being guaranteed.

Importantly, avoiding LMI does not mean the loan itself becomes smaller. You are still responsible for repaying the money you borrow.

Not necessarily.

A guarantor may be able to have an existing mortgage over their property provided there is sufficient usable equity and the proposed lender's requirements can be satisfied.

The lender will generally need to consider the property's value, existing debt and the amount of additional security required for the guarantee.

Potentially. Retirement does not automatically prevent a parent from being considered as a guarantor, but lenders can have specific requirements regarding guarantor eligibility and circumstances.

The lender may consider matters such as the guarantor's age, financial position, existing debts, property ownership and their understanding of the financial commitment.

Guarantors should understand the risks involved and obtain the independent legal advice required by the lender.

A guarantee does not necessarily need to remain in place for the full loan term.

It may be possible to request its release once there is sufficient equity in the property and the remaining loan satisfies the lender's requirements without the additional guarantor security. This can occur through loan repayments, an increase in the property's value, or a combination of both.

The lender will generally need to approve the release, and a new property valuation may be required.

It can.

A guarantee is a financial commitment and may be considered when the guarantor applies for finance of their own. The effect will depend on the guarantee structure, the lender assessing their future application and their overall financial position.

This is particularly important if the proposed guarantor expects to refinance, buy another property, invest or obtain other finance in the future.

The borrower remains responsible for making the home loan repayments.

If repayments are not made and the borrower defaults, the lender may ultimately seek recovery under the guarantee in accordance with the loan and guarantee documents. Depending on the circumstances, the guarantor's property may therefore be exposed to financial risk.

This is why becoming a guarantor is a significant financial decision rather than simply helping someone qualify for a loan. The guarantor should understand the extent of the guarantee and obtain independent legal advice before proceeding.

Potentially.

If the property has increased in value, the loan balance has reduced, or your overall financial position has changed, refinancing may provide a way to release the guarantor.

However, refinancing is not automatically necessary. Your existing lender may also have a process for releasing the guarantee once its requirements are satisfied.

Before refinancing solely to remove a guarantor, it is worth comparing the costs and benefits of refinancing against requesting a release through the existing lender.

Guarantor lending is commonly associated with helping family members purchase an owner-occupied home, but whether a guarantee can be used for an investment purchase depends on the lender's policy and the proposed structure.

Investment lending also introduces different servicing, tax and loan-structuring considerations. The guarantor and borrower should understand exactly what property is being purchased, the extent of the guarantee and how the guarantee is intended to be released.