A Guide to Guarantor Home Loan Requirements

The main issue for many first-time homeowners and investors in the current property market is the ability to save a deposit.

Pulling together a big enough deposit remains a struggle for many would-be property buyers, especially when they have to pay for their living costs, including rent, at the same time.

While house prices in Sydney and Melbourne have reduced over the past two years, the strong growth that proceeded these softer market conditions means prices remain high for first home buyers.

However, with interest rates at historic lows, the ability to afford mortgage repayments once you’re in the market has improved significantly.

One way to get a start on the property ladder sooner is by using guarantor home loans that can help get more prospective buyers into their first property.

Guarantor Loan Requirements

What is the structure of guarantor home loan?

Guarantor loans can be a great way for young people to achieve a deposit, but their ins and outs must be understood from the outset.

  1. A guarantor loan works by someone else (more on that a bit later) providing equity or security in their property to fund part, or the whole, deposit.
  2. A guarantor loan requirement is sufficient equity in the property offered as security.
  3. A guarantor doesn’t need to be involved in the loan for its entirely. Instead, it’s advisable that the property owner actually works towards getting the guarantor “released” from the loan, which can be achieved by paying down the mortgage or improving the property via renovations and therefore increasing its value.
  4. A guarantor is a person or persons who assumes responsibility for paying off the loan if you’re no longer able to meet your financial commitment. Essentially, the guarantor takes financial responsibility for servicing the home loan in the event that you default on your repayments. Even if the guarantee is only for 20 per cent of the entire loan, the guarantor will be wholly and severally responsible for the loan but doesn’t have ownership rights to the property.

An example of how a guarantor loan can work is:

John and Jill want to buy a $750,000 home but have struggled to save a big enough deposit. In fact, they have only managed to save enough to pay the stamp duty and associated costs. As newly-weds, they approach John’s parents who have paid off their own home, who then agree to use $150,000 of their own equity to finance the required 20 per cent deposit for the couple.

Who can be a guarantor?

Checklist Flat Illustration

The main consideration with guarantor home loans is that they must be provided by someone who has a strong relationship with the buyer or buyers, which generally means immediate family members such as:

  • Parents
  • Siblings
  • Grandparents
  • Spouses
  • De facto partners.

There are a number of considerations for guarantor home loan requirements that the lender will take into account. These include:

  • Their age
  • Whether their property is in Australia
  • If they have sufficient equity
  • Whether they are currently employed

A guarantor also needs to be of sound mind and will need to seek both legal and financial advice before making the decision to act as a mortgage guarantor.

How much can you borrow?

While the lending environment remains tight, there are more loan products on the market now that suit first home buyers.

These are generally loans that offer higher loan to value ratios (LVR), which ultimately means that the deposit can be lower.

For example, there are loans which require only a five to 10 per cent deposit, which makes it easier to save the required amount.

On top of that, many first-timers might then use a guarantor to increase the deposit to 20 per cent of the purchase price which will remove the requirement to pay Lenders Mortgage Insurance or LMI.

In fact, by using a guarantor home loan, lenders are generally more flexible with their lending criteria, which means that prospective property buyers can usually access loans with LVRs in the 90 per cent range.

Of course, guarantor home loans do require a number of checks and balances, such as a requirement that you hold documentation for three days that will mean you have been deemed to have read and understood the requirements.

However, working with expert finance brokers ensures that any hoops you have to jump through will be like a walk in the park.

Andrew Mirams

Andrew Mirams

Andrew Mirams is the Managing Director of Intuitive Finance and is a highly qualified mortgage advisor who holds dual diplomas in Financial Planning (Financial Services) and Banking and Finance (Mortgage Broking). Andrew’s expertise covers all aspects of lending for a diverse range of applications – from first home buyer loans or property upgrader loans, property investor loans, expatriates and loans for self-employed. With almost 30 years of experience, Andrew has been acknowledged by the mortgage industry as one of its best performers with multiple awards including regularly featuring in both the top 100 mortgage brokers list and Top 50 Elite business writers. Andrew was voted Victoria's favourite Mortgage Broker at the 2015 Investors Choice Awards, and won again for the same category at the 2017 Better Business Awards. The team at Intuitive Finance has also figured prominently by winning the 2016 "Best Independent Office (<5 brokers)" and "Best customer Service" Awards, and more recently at the 2017 MFAA National Awards, they also took out the "Best Customer Service" Award, a recognition which speaks for itself! Visit Intuitive Finance for more information.
Andrew Mirams

10 Comments. Leave new

Hi there,

Would like to ask if a credit check is still required even my love ones is the guarantor of my loan. reason behind this is my credit back ground is not too healthy when i was going though a separation with my defacto 8 years ago.

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Avatar for Andrew Mirams
Andrew Mirams
May 3, 2018 7:28 pm

Hi Joe,
Thanks for your question, it’s a really good one.
Just to clarify, are you asking if you are the guarantor, do you need a credit check? If so, the answer is that it depends on the lender who you approach and what is required as some do and others don’t.
If your question is as the borrower, then in every instance a credit check is required.

I hope this helps.

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Hi,
My brother and I are both looking to buy houses within the next year. My parents have offered to go guarantor for us both. Can someone be a guarantor for 2 separate properties at the same time?

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Andrew Mirams
August 8, 2018 4:59 pm

Hi Lucy,

That’s a great question. There are a few things to consider but the short answer (and good news) is Yes, they absolutely can be guarantor for more than 1 person at the same time.

If you wanted more information, we’d be thrilled to be able to assist you.

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How much of the property do your parents need to own ? My mum and her partner re financed his property that he had previously owned with his ex wife, they re brought the home nearly 12 months ago. They own about 120000 of the home would they be considered to be a guarantor for me and my husband to buy a house ?

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Hi Bec,
That’s a great question, thanks. What they need to have is enough equity in the property to be able to support the shortfall you have in your purchase. So it’s hard to give exact numbers here as we don’t what the figure is that you are looking to buy for but in principle, Yes, that could be sufficient to assist you and your husband buy your home.

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If my parents have property overseas (UK and NZ) could the still act as guarantor?

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Hi Nick,
That is a great question.
The answer is Yes, they can act as a guarantor still, however they cannot use the overseas property as security to assist. And property security would have to be here in Australia.

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Hi, I currently have a rental property & looking at getting another rental with the assistance of my parents going guarantor for the 2nd property. Do I, as the purchaser still need to meet criteria to the bank in regards to my lending / earning capacity as the banks have previously advised my earning capacity is not sufficient enough for 2 rental properties

Reply

Hi Adelle,
Thanks for your question, it is a very good one.
Yes, as the purchaser/owner, it is your responsibility to meet the lending criteria to see if you can meet the requirements for another loan.
We’d be more than happy to undertake a review of your current position and advise our thoughts on your capacity if that would be of interest to you?
Feel free to email us at info@intuitivefinance.com.au or call the office on 1300342505 and one of our experts will be happy to chat to you.

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