Guarantor loans

Having a family guarantor can get you into a home with little to no deposit.

Generally, banks require a 20% deposit to buy a home (to avoid lenders mortgage insurance). When a guarantor uses a portion of their home as security, the bank won’t need a deposit and you don’t need to pay lenders mortgage insurance.

How it works

Let’s say you want to buy a home for $600,000 and your bank requires at least 20% deposit which is around $120,000. You have some savings, but not enough to cover the deposit.

Assume your parents home is valued at $1,000,000 and their mortgage is only $500,000. This means they have equity available, and they can offer $120,000 as security towards your home loan.

With the added security, your bank will now lend you 100% of house price, plus purchase costs. This means you don’t need any deposit savings and you can avoid paying lenders mortgage insurance!

Who can guarantor?

It really depends on the bank, but it’s generally limited to immediate family members like parents, siblings, children or grandparents. In addition, the guarantor will need to have enough equity available to cover the required security portion.

Points to consider

  • It’s not forever. Once the equity in your home reaches 20%, you and your parents can apply to release the guarantee. Equity increases as your home grows in value and you pay down your mortgage.

  • Guarantees are limited. The guarantor’s security does not cover the entire loan amount. Just a portion of it in lieu of you having to save the full deposit. The guarantee is limited to this amount.

  • Consider the risks. Guarantors need to consider any risk involved. For example, if you couldn’t pay your mortgage, and the bank takes possession and sells the property, the guarantor may be liable to cover any outstanding amounts (up to the value of their security value).

  • Always seek advice. It’s important to seek financial and legal advice before agreeing to act guarantor.