Rising property prices, high interest rates and saving enough for a house deposit are common challenges faced by first home buyers.1
While governments across the country have implemented various grants and schemes to support aspiring home owners, those who may be struggling to purchase a property might turn to a guarantor home loan. This type of home loan means someone else – typically a parent – agrees to “guarantee” your loan by offering up something of theirs as security for the loan – typically, a portion of their equity in the home they own.2
“Finding a guarantor is one of the most popular ways to avoid paying lender’s mortgage insurance and for many first home buyers, it can be a gamechanger,” says Sally Tindall, Data Insights Director at Canstar.
“However, asking your parents to go guarantor on your mortgage is not like asking them to sign a school permission slip. Firstly, it requires you to have an immediate family member who is willing to put up their property as collateral.
“Then, both parties have to get legal advice to understand the roles and risks – and be across the reams of fine print. Most importantly, you’ll need to openly canvas the ‘what ifs’ and consider the answers to them.”
According to research conducted for the Centre for Equitable Housing, since 2020 around 30% of first home buyers have received financial assistance from their family to buy their first property.3
Let’s explore how guarantor home loans work, who can be a guarantor, the risks and benefits, and where and when home insurance fits in.
What is a guarantor home loan and how does it work?
A guarantor home loan allows a person other than the borrower – typically a family member – to offer part of their property or savings as security against the loan.2
This could provide the lender with enough security for the borrower to take out the loan with as little as 5% in genuine savings or, in some cases, no deposit at all.2
As the home owner, you’ll remain primarily accountable for the loan repayments, including any associated interest and fees. However, if you’re unable to meet these obligations, your lender may request payment from your guarantor to cover the outstanding amount.2
Essentially, this means that the guarantor acts as an additional assurance for the lender by agreeing to cover the shortfall if the borrower defaults on their loan.4
Why do people need guarantors?
As property prices continue to climb, saving for a house deposit has become a significant barrier for many first-time buyers, with recent reports suggesting it can now take an average of almost five years to save for a 20% deposit on an entry-priced house in Australia.5
In addition to financial support, having a guarantor could help the borrower avoid the cost of lender’s mortgage insurance, which is often required when the deposit is less than 20%.2
Who can be a guarantor for a home loan in Australia?
In Australia, a guarantor is typically an immediate family member. However, some lenders may allow other relatives, such as siblings or grandparents, to act as guarantors, provided they meet the lending requirements.2
Generally, guarantors must be:6
- Over 18 and typically under 65
- Australian citizens or permanent residents
- Holders of a good credit score
- Owners of a home with sufficient usable equity
- Able to meet the lender’s income requirements.6
It’s important to remember that being a guarantor is a serious financial commitment, and not everyone may be eligible. Lenders will typically assess the guarantor’s ability to cover the loan portion if the borrower defaults, which means that guarantors should have sufficient income and assets, and minimal existing debt.2
Some buyers choose to work with a home lending specialist or mortgage broker who can clarify the guarantor loan requirements in Australia and discuss any restrictions specific to certain lenders.
Risks and considerations for guarantors and borrowers
While a guarantor home loan can offer an alternative pathway to home ownership, there are several risks involved, particularly for the guarantor.
The federal government’s Moneysmart website suggests that guarantors consider the following:4
- Financial liability: If the borrower defaults on the loan repayments, the guarantor must pay back the entire loan, plus interest. If you can’t manage this, the lender could repossess assets you’ve used as security for the loan.
- Credit impact: Future lenders may choose not to lend to you once they learn you are a guarantor on another loan.
- Family conflict: Financial arrangements between family members may lead to tension. If you’re not comfortable guaranteeing the loan, you could consider contributing to the home deposit instead.4
Seeking legal advice could be a way for both parties to minimise risk. Consulting a home lending specialist may also help address any questions and clarify specific lender policies.
Is a guarantor home loan right for you?
For some buyers struggling to save a deposit in today’s housing market, a guarantor home loan may offer an accessible pathway to home ownership.2
However, there are risks to consider – not least of which is the impact on important family relationships should things go wrong. Speaking with a mortgage broker or a home lending specialist might help clarify the guarantor loan requirements.
Where does home insurance come into it?
Many lenders require buyers to have home insurance in place before the settlement, as it safeguards both the lender’s and borrower’s interests.7 Youi’s home insurance options include Building insurance and Building and Contents insurance.
Buying a home can be complicated but when it comes to insurance, Youi makes the process as easy as possible. Once you’ve found the home of your dreams, consider starting a quote with Youi for home insurance that’s a bit more you-shaped.
1 Source: Nine News – First home deposits rise 99 per cent in just 12 years, data shows, September 2024
2 Source: Canstar – Guarantor home loans: How do they work?, August 2024
3 Source: Centre for Equitable Housing – Research Results
4 Source: Moneysmart – Going guarantor on a loan
5 Source: Domain – This is how long it takes a first-home buyer to save for a deposit in every capital city in Australia, February 2024
6 Source: Money.com.au – Guarantor Home Loan Rates & Requirements
7 Source: Consumer Affairs Victoria – Property settlement
