For many aspiring homeowners, saving a deposit while paying rent can seem like an uphill battle. However, there's a potential solution that could help you secure a home sooner—a guarantor. But what exactly does a guarantor do, and how can they assist in getting you onto the property ladder?

What is a Guarantor?

A guarantor is typically a family member—often a parent, grandparent, or sibling—who provides additional security to support your mortgage application. Rather than offering you money upfront, they use the equity in their home to strengthen your loan application.

This added security can significantly improve your chances of securing a home loan, especially if you haven’t been able to save a large deposit. Some lenders even allow extended family members or ex-spouses to act as guarantors, though this varies by lender.

How Does a Guarantor Home Loan Work?

Saving for a home deposit is one of the biggest challenges for first-time buyers. A guarantor loan allows you to enter the property market sooner, potentially with a smaller deposit—or even no deposit at all. Here's how it works:

• A guarantor offers part of their home’s equity as additional security for your loan.

• This can help you meet the lender’s requirement for a 20% deposit, which is often necessary to avoid Lenders Mortgage Insurance (LMI).

• LMI can be expensive, often adding thousands to your loan. With a guarantor loan, you could skip this cost entirely.

Example: Buying a Home with a Guarantor

Imagine you want to buy a home worth $500,000 but only have $50,000 saved—equivalent to 10% of the property’s value. Typically, you’d need to save an additional $50,000 to reach a 20% deposit, or else pay LMI. Instead, a guarantor could offer $50,000 of their home equity as security, allowing you to purchase the property without waiting to save more or paying LMI.

Importantly, the guarantor isn’t required to make any loan payments unless you default. However, if you can’t keep up with your repayments, the lender may ask the guarantor to cover them, meaning there is some level of risk involved for the guarantor.

Becoming or Using a Guarantor

Being a guarantor is a big commitment. It’s crucial that both the borrower and the guarantor fully understand the implications before entering into such an arrangement. For this reason, many lenders require that guarantors seek independent legal and financial advice before proceeding.

Requirements for a Guarantor Loan

To qualify for a guarantor home loan, you’ll need a family member who owns a home and has built up sufficient equity. Equity is the difference between their home’s current value and the balance left on their mortgage. That equity acts as security for your loan.

While having a guarantor can significantly improve your borrowing power, it’s important for both parties to understand that if you fall behind on repayments, the guarantor could be liable for the loan.

How a Guarantor Can Help Your Application

If you have the income to support home loan repayments but struggle to save a deposit, a guarantor can provide the security a lender needs to approve your loan. Some lenders will let you borrow the full purchase price of the home, and in some cases, even cover additional costs like stamp duty.

Beyond boosting your borrowing capacity, using a guarantor can save you a substantial amount by helping you avoid LMI. Typically, LMI is required when your deposit is less than 20% of the property’s value. By using a guarantor’s equity to meet this 20% threshold, you can bypass this cost.

Releasing a Guarantor

A guarantor’s commitment doesn’t last forever. Once you’ve built up enough equity in your property, they can request to be released from the loan. This typically happens after several years of repayments, or if your home appreciates in value. There may be some fees involved, including revaluation of your home, but the guarantor’s financial obligations end once they are released from the loan.

Final Thoughts: The Benefits and Risks of a Guarantor Loan

A guarantor loan can make homeownership achievable sooner, offering first-time buyers a way to avoid LMI and potentially buy a home with little or no deposit. However, both the borrower and the guarantor need to be aware of the responsibilities involved. The guarantor is essentially taking on the risk of your loan, so it’s vital to ensure that everyone is comfortable with the arrangement.

If you’re considering using a guarantor, or becoming one, make sure to seek professional advice and thoroughly understand all the risks before proceeding.

Are you ready to take the next step towards homeownership? Contact Crown Property Finance for expert advice and a tailored home loan solution.