How Guarantor Support Works: A Simple Guide

For many Australians, especially first-time homebuyers, saving up a large enough deposit can be a big challenge. This is where guarantor support can make a real difference. If you’ve been hearing about guarantor loans and are wondering how they work, here’s a simple breakdown to help you understand the process.

 What is a Guarantor Loan?

 A guarantor loan allows a family member (usually a parent) to help you buy a home by using their own property as security for part or all of your loan. This can be a game-changer for people who have good income but struggle to save the typical 20% deposit required to avoid lenders mortgage insurance (LMI).

 Here’s how it works:

Instead of needing to save up the full deposit yourself, your guarantor provides additional security by using the equity in their property. This reduces the lender’s risk and can allow you to:

• Buy a home with a smaller deposit.

• Avoid paying LMI, which can be thousands of dollars.

How Does Guarantor Support Work?

When a guarantor supports your loan, they agree to use the equity in their home as a guarantee for a portion of your loan. This doesn’t mean they give you cash—it’s more like offering their property as extra security to back up your loan.

Here’s a simplified example:

• Let’s say you’re buying a $500,000 home and need a 20% deposit ($100,000) to avoid LMI.

• You’ve only saved $50,000 (10%).

• Your guarantor can cover the remaining $50,000 by using the equity in their own home as security for that amount.

This means you now have the equivalent of a 20% deposit, which can help you get the loan you need without paying LMI.

Key Points to Understand:

•  The Guarantor’s Risk: While a guarantor doesn’t give you money, they are taking on a risk. If you default on your loan and can’t make your repayments, the lender can ask the guarantor to step in and cover the shortfall. That’s why it’s important for both the borrower and guarantor to fully understand their responsibilities.

• Limited Guarantee: Guarantors don’t have to guarantee the full loan amount. In most cases, they can limit their guarantee to the amount needed to make up the deposit gap (usually 20%). This can help protect the guarantor from having to cover the entire loan amount if things go wrong.

• Releasing the Guarantor: The guarantor isn’t tied to your loan forever. Once you’ve paid down your loan enough (or the value of your home has increased), you can refinance and release the guarantor from their responsibility. This usually happens when your loan-to-value ratio (LVR) drops to 80% or lower.

Who Can Be a Guarantor?

Typically, guarantors are parents or close family members. However, lenders have different rules, so it’s important to check with your mortgage broker about who can act as a guarantor in your situation.

The guarantor needs to:

• Have enough equity in their own property to cover the guarantee.

• Be in a stable financial position, as lenders will assess their ability to take on the risk.

What Are the Benefits of Using a Guarantor?

Guarantor loans offer several key benefits, including:

•  Avoiding Lenders Mortgage Insurance (LMI): LMI is usually required when you have less than a 20% deposit. By having a guarantor, you can avoid paying this extra cost.

• Entering the Property Market Sooner: If you’re struggling to save a full deposit, guarantor support allows you to buy a home sooner rather than later.

• Potentially Borrowing More: Depending on your income and financial situation, having a guarantor may allow you to borrow more, giving you access to a wider range of properties.

What Are the Risks?

For borrowers, the main risk is that if you can’t keep up with your mortgage repayments, your guarantor’s property could be at risk. For guarantors, it’s important to be fully aware of the financial responsibility you’re taking on. If the borrower defaults, the lender can require you to step in and cover any shortfall or, in extreme cases, force the sale of your property to recover the funds.

Both parties may want to seek independent legal and financial advice before entering into a guarantor arrangement to make sure they understand the risks (and for some lenders, this is a requirement of providing finance).

Is a Guarantor Loan Right for You?

If you’re ready to buy a home but struggling to save a deposit, a guarantor loan could be a great option to help you get into the property market sooner. However, it’s important to carefully consider the responsibility and to make sure you have a solid financial plan in place.

At Arcadia Finance Solutions, we specialize in helping buyers navigate the complexities of guarantor loans. If you’d like to explore whether this option could work for you, get in touch today.