Guide to Guarantors (for borrowers)

What is a guarantor?

A guarantor is typically a family member who uses their property as additional security to help you secure a home loan. This arrangement allows you to borrow money when you might not have sufficient deposit or income to qualify for a loan on your own. The guarantor doesn't provide cash upfront but instead offers their property equity as collateral, giving the lender additional security and confidence in approving your loan application.

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Who can be a guarantor?

Most lenders prefer guarantors to be immediate family members such as parents, siblings, or sometimes grandparents. The guarantor must own property with sufficient equity and demonstrate financial stability:

• Parents or immediate family members
• Must own property with sufficient equity (typically 20%+ of loan value)
• Need stable income and good credit history
• Should understand the legal and financial implications

How it works

When you use a guarantor, their property secures the portion of your loan that exceeds 80% of your property's value. You remain responsible for all loan repayments, while the guarantor's liability reduces as you pay down the loan balance over time.

• Guarantor's property secures part of your loan
• You're still responsible for all repayments
• Guarantor liability reduces as you pay down the loan
• Can be structured as limited or unlimited guarantee

Benefits for borrowers

Using a guarantor can significantly improve your borrowing position and help you enter the property market sooner. The main advantages include avoiding lender's mortgage insurance costs and accessing better interest rates due to the additional security provided.

• Purchase with as little as 5% deposit
• Avoid lender's mortgage insurance (saving thousands)
• Access better interest rates and loan features
• Enter property market sooner without waiting to save larger deposit

Risks for guarantors

While helping family members achieve home ownership is rewarding, guarantors face significant financial risks that must be carefully considered. The guarantor becomes liable for loan repayments if the borrower defaults, potentially putting their own property at risk.

• Liable if borrower defaults on payments
• Their property can be sold to cover debt
• Credit score affected by borrower's payment history
• May impact their own borrowing capacity
• Potential family relationship strain if issues arise

Exit strategies

Most guarantor arrangements include clear exit strategies to release the guarantor from their obligations once certain conditions are met. This typically occurs when the borrower builds sufficient equity in their property.

• Refinance when you have 20% equity in property
• Sell and downsize to release guarantor
• Make additional repayments to reach 80% LVR faster
• Property value increases may enable earlier release