Guarantor Home Loans: Bridge the Deposit Gap

At Ausfirst Lending Group, we support first home buyers and low-deposit borrowers with expert guidance on guarantor loan options tailored to your unique circumstances. Whether you’re looking to enter the market with minimal savings or purchase a property that would otherwise be out of reach, our mortgage brokers can help you understand if this approach could fit your financial goals and family situation.

What Is a Guarantor Home Loan, and How Does It Work?

A guarantor home loan involves a third party – often a parent or close relative – who uses the equity in their own home to back your loan. This added security can help reduce your loan-to-value ratio (LVR) and may allow you to borrow with little or no deposit.

Here’s how guarantor home loans work:

• Security Arrangement: Your guarantor does not provide any cash; instead, a portion of their property’s equity is used to support your home loan. The lender takes a limited guarantee over the guarantor’s property, alongside the primary security (your new home).
• Family Involvement: Most lenders prefer a parent, grandparent, or sibling to act as guarantor, though some accept extended family or ex-partners depending on their policy. The guarantor must be a property owner with enough equity.
• Deposit Flexibility: You might only need a minimal deposit – or none at all – because the guarantor’s equity bridges the gap to meet the 20% deposit threshold. This structure can fast-track your home purchase.
• Repayment Responsibility: You remain fully responsible for making repayments. However, if you default, the lender may ask the guarantor to cover missed payments or settle the guaranteed portion of the loan.

What Are the Benefits of a Guarantor Home Loan?

A guarantor home loan comes with several advantages that can ease the path to homeownership. Below are some of the typical reasons borrowers choose this option:

Faster Property Purchase

With help from a guarantor, you may not need to wait years to save a 20% deposit. This could allow you to buy sooner and stop renting sooner.

LMI Savings

Avoiding LMI may be considered one of the biggest financial perks. LMI can cost thousands if you have a high LVR, and using a guarantor may eliminate this cost altogether.

Increased Borrowing Capacity

The added security could allow you to borrow more than you otherwise could, which might help you buy in a location you prefer or get a larger property.

Access for Low-Deposit Buyers

If you have a strong income but limited savings, a guarantor loan might still get approved. Some lenders may even let you borrow 100% or more of the property’s purchase price.

Option for Future Release

Once you’ve established sufficient equity in your home – typically 10% to 20% – you may apply to remove the guarantor. This can be done through internal refinance or a loan reassessment.

What Are the Risks of Guarantor Home Loans?

While a guarantor loan can open doors, it’s essential to be mindful of the potential drawbacks. Here are the main risks that both borrowers and guarantors need to consider carefully:

Guarantor Liability

If you are unable to keep up with repayments, your guarantor becomes liable for the guaranteed portion of the loan. In worst-case scenarios, this could result in the forced sale of their home.

Reduced Financial Flexibility

Once someone becomes a guarantor, their ability to borrow for their own needs – like investment or renovation – may be limited due to their financial exposure.

Credit File Impact

The guarantor’s credit record may show a credit enquiry and ongoing liability, which could affect their future finance applications.

Emotional and Relational Pressure

Mixing family and finances can lead to strain. It’s important that both parties enter the arrangement with clear expectations and mutual trust.

Legal Obligations

Most lenders will require guarantors to seek independent legal and financial advice before proceeding. This protects all parties by ensuring the decision is informed and voluntary.

Who Can Be a Guarantor?

Lenders apply specific eligibility criteria when assessing who can act as a guarantor. Below are key factors they usually consider:

Family Relationships

Typically, guarantors are immediate family members such as parents, siblings, or grandparents. Some lenders may accept extended family or ex-spouses, but this can vary from one policy to another.

Property Ownership

The guarantor generally needs to own a residential property in Australia and have sufficient equity available to offer as security.

Financial Position

Lenders usually assess the guarantor’s income, assets, liabilities, and credit history to determine whether they are likely to meet repayment obligations if necessary.

Age Considerations

Older guarantors might face more scrutiny due to retirement planning and long-term risk exposure. However, age itself is not necessarily a disqualifying factor.

Consent and Understanding

A guarantor must agree to the arrangement freely and be fully informed of their obligations. They are typically required to sign formal documents and complete a legal consultation.

Who Can Apply for a Guarantor Home Loan?

Not everyone is eligible for a guarantor loan, and lenders apply standard checks even when a guarantor is involved. Lenders may take the following factors into account:

Borrower Profile

You’ll generally need to demonstrate stable employment, consistent income, and manageable existing debts. A good credit history is often essential.

Deposit and Savings

Even if a guarantor covers the security shortfall, some lenders might still require you to contribute a small deposit or show genuine savings.

Loan Purpose

Most guarantor home loans are commonly used for buying a first home, but they can also apply to investment properties. The lender will review the property’s valuation and location.

Property Type

Not all properties are eligible. Lenders will assess the type, condition, and marketability of the home being purchased.

Agreement with Guarantor

You must have a willing and eligible guarantor who understands their role and has agreed to the lender’s terms and conditions.

When Can a Guarantor Be Released from the Loan?

A guarantor doesn’t stay on your loan forever. Below is an overview of when a guarantor may be released and what factors lenders usually assess during the process:

• Equity Requirement: Once you’ve built up 10% to 20% equity in your home – through repayments or capital growth – you may be able to request the guarantor’s release.
• Refinancing and Lender Assessment: Most lenders will require you to refinance the loan internally to remove the guarantor. This typically includes a new property valuation, a credit check, and a review of your repayment history and income to ensure you can manage the loan independently.
• Potential Fees: You may encounter lender discharge fees, valuation costs, or administrative charges. It is advisable to factor these into your decision to remove the guarantee.
• Timeframe Considerations: The time it takes to reach the equity threshold can vary based on property market conditions and how quickly you repay your loan. 

Can You Change or Switch a Guarantor Home Loan Later?

Refinancing or switching guarantor home loans is often possible, and it could help you access better rates or remove your guarantor. Here are some key points to consider:

• Refinance Opportunities: Once your financial position improves, you may be able to switch to a standard loan. This often involves releasing the guarantor and adjusting your loan structure.
• Improved Terms: You might secure a lower interest rate or more flexible loan features when switching. This can reduce your repayments and support long-term financial goals.
• Guarantor Release: Many borrowers refinance specifically to remove the guarantor after reaching enough equity. 
• Eligibility Reassessment: You’ll need to pass serviceability and credit checks again, just as you did when first applying. Lenders will also reassess the security property’s value.

Financing with Family Support Through Ausfirst Lending

If saving a full deposit feels out of reach, a guarantor home loan may offer a practical alternative to help you secure property sooner. By using a family member’s equity as added security, you could access favourable lending terms, avoid LMI, and potentially borrow the full purchase price of your home.

At Ausfirst Lending, our mortgage brokers take the time to understand your financial goals, explore suitable structures for guarantor home loans, and connect you with lenders that align with your needs – helping you move towards homeownership with the right support at every step.

Why Choose Ausfirst Lending Group

Dedicated Guidance and Comprehensive Service

At Ausfirst Lending Group, you are our top priority. We are dedicated to providing comprehensive assistance from start to finish, not just because we are legally obligated to act in your favour, but because we genuinely want to ensure your success. 

We focus on your objectives and requirements, and combine deep industry knowledge with a strong commitment to finding loan options that truly align with your financial needs. We simplify the entire loan application process by assessing your borrowing capacity, organising documentation, and negotiating terms on your behalf, all while securing the most favourable outcomes for you.

Extensive Lender Options

One of the key benefits of working with Ausfirst Lending is our access to a diverse range of lenders. Instead of presenting just one option, we assess a broad array of options according to your financial needs. This allows us to tailor solutions that match your specific goals and circumstances, ensuring you get the best possible outcome.