When talking about a guarantor home loan, many home buyers wonder if it’s the right choice. This type of loan can help borrowers enter the property market sooner. With the help of a guarantor, you could avoid paying Lenders Mortgage Insurance (LMI) and secure a home loan with a low deposit.
What Is a Guarantor Home Loan & How Does It Work?
A guarantor home loan allows borrowers to purchase a home with a lower deposit by using a guarantor’s home as security for the loan. This arrangement helps borrowers buy a home sooner without needing a large upfront deposit. Instead of saving a 20% deposit, borrowers can access financing with the help of a guarantor loan, reducing costs and increasing borrowing power.
A guarantor must be a homeowner, typically a family member, who provides additional loan security using their home equity to cover a portion of the loan. Their property acts as security for your home loan, covering part of the risk for the lender. This means borrowers can receive loan approval faster, making the home loan application process smoother.
The loan terms and conditions remain the borrower’s responsibility. However, if the borrower defaults on the loan, the guarantor may need to step in to cover the guaranteed portion of the loan. Before proceeding with a home loan application, both the borrower and guarantor must understand the obligations, risks, and potential impact on financial stability.
Home Loan Guarantor Requirements – Who Can Be a Guarantor?
Not everyone can act as a guarantor. A home loan guarantor must meet certain criteria:
- Be a homeowner with sufficient equity in the home to secure the loan.
- Have a stable financial position to provide security for your loan.
- Agree to be a guarantor with full awareness of the risks involved.
Lenders typically require the guarantor to be a close relative, such as a parent or sibling. That’s why it’s essential for both the borrower and guarantor to fully understand their obligations before applying for a guarantor loan.
Family Guarantor Home Loans – How Your Loved Ones Can Help
A family guarantor loan allows a family member to assist in securing a loan. This type of loan can be beneficial for first home buyers struggling to save a large deposit. The Australian Government’s Family Home Guarantee also helps single parents enter the property market with a smaller initial contribution.
With a family home guarantee, the government secures a portion of the loan amount, reducing the guarantor’s required security. This makes it easier for borrowers to access funding without a large upfront payment.
How to Remove a Guarantor from a Home Loan
A guarantor can be removed once the borrower builds enough real estate equity or repays the loan to a sufficient level. This process typically involves refinancing to a home loan without a guarantor. Steps include:
- Building property equity by making consistent home loan repayments.
- This involves refinancing with a lender so that the loan is secured solely with the borrower’s property.
- Ensuring financial stability so the borrower is able to refinance their guarantor home loan independently.
Lenders assess the borrower’s ability to manage the entire loan without additional security for the loan before approving a release.
Benefits & Risks of Getting a Guarantor Home Loan
A guarantor home loan can help borrowers enter the property market sooner. Key benefits include:
- Lower deposit requirements – Borrowers can access a loan with a low deposit, making it easier to purchase a home without waiting years to save.
- Avoiding Lenders Mortgage Insurance (LMI) – By using security for your home loan, you may save thousands on LMI, reducing overall borrowing costs.
- Increased borrowing power – Lenders may increase how much you can borrow, allowing access to better properties in desirable locations.
However, there are risks:
- If the borrower defaults on their loan, the guarantor could lose their property – The lender may take legal action against them, potentially forcing the sale of their home.
- Guarantors are liable to repay the loan if the borrower fails to meet payments – If the borrower cannot meet their repayments, the guarantor must step in and cover the outstanding balance.
- Financial strain on the guarantor, especially if their home is used as security for the loan – A guarantor’s financial position may be impacted, making it harder to access credit or refinance their own mortgage.
How Long Does a Guarantor Remain on a Home Loan?.
A guarantor typically remains on the loan until the borrower has enough home equity to secure the entire loan. On average, this process takes between three to five years, but the exact timeline depends on several factors. The speed at which the borrower repays the loan, property value appreciation, and the availability of refinancing options all influence when a guarantor can be removed.
When taking out a loan with a guarantor, it’s essential to have a long-term strategy. Borrowers should aim to increase their home equity by making consistent home loan repayments and ensuring their financial stability. Additionally, property market trends play a key role—if the home’s value rises significantly, the borrower may reach the required equity threshold sooner.
Refinancing is another common way to release a guarantor. Lenders will assess the borrower’s ability to manage the entire loan without a guarantor before approving the transition. To refinance successfully, the borrower must demonstrate financial responsibility, a strong repayment history, and have repaid a sufficient portion of the loan.
A guarantor will need to meet the lender’s criteria before being released, ensuring the borrower is financially capable of handling the mortgage independently. Seeking advice from a home lending specialist or broker can help determine the right time to remove a guarantor on their home loan and explore refinancing options tailored to the borrower’s situation.
Getting a Guarantor Home Loan – Is It Right for You?
When considering a guarantor loan, assess your financial situation. If you lack a large deposit, this type of loan could be a great way to secure the loan. However, it’s essential to plan for future loan repayments to avoid financial strain.
A low deposit home loan is another alternative, allowing borrowers to apply for a home loan without a guarantor. Comparing different home loan options helps find the right solution. Recent home loan statistics show an increase in new home loan commitments, highlighting trends in borrowing and homeownership in Australia.
Speak to a Mortgage Broker About Your Home Loan Options
Thinking about guaranteeing a loan for a loved one? Or do you need help getting a home loan? At Kaleido Loans, we compare loans from over 25 leading lenders to find the best solution for your needs.
Speak to one of our home lending specialists today to explore your options. Whether you’re applying for
