A Guide to Guarantor Loans: Buying Property with No Deposit
Your complete guide to guarantor loans - get into your first home sooner with little to no deposit.
Are you a first home buyer looking to enter the property market, but struggling to save a deposit? “Get your parents to go guarantor” is advice many first home buyers hear. Guarantor loans, also known as “Family Pledge Loans”, can help you purchase a property with limited or no deposit. Don’t get us wrong, navigating these complex loans can be confusing – but this guide breaks down everything you need to know about this increasingly popular option.
What is a Guarantor Loan?
A guarantor loan allows a third party—typically your parents, siblings, or children—to offer up their property as additional security to help you secure a home loan. For this arrangement to work, your guarantor must have sufficient equity in their home, and the lender must deem them suitable to provide the guarantee. Certain factors, such as relying on a pension or Centrelink payments may disqualify someone from being a guarantor.
These loans are particularly beneficial for people with good income but little to no deposit.
How Does a Guarantor Loan Work?
Let’s use an example to explain how most lenders structure guarantor loans:
Matthew is purchasing a property for $500,000 in Brisbane. For this example, Matthew does not have a cash deposit and also wants to borrow $30,000 to cover the costs of purchasing the property such as stamp duty. The total amount Matthew wants to borrow is $530,000.
The lender splits this $530,000 into two portions:
- The first loan is for 80% of the property value being purchased - $400,000 based on the $500,000 purchase price.
- The remaining $130,000 is set up as a separate loan secured against the guarantor’s property.
Both loans are in Matthew’s name. The loans won’t appear on his guarantor’s credit history, and the guarantor isn’t responsible for repaying the debt. Matthew must have sufficient income to service the total debt he is borrowing. The guarantor’s income is not considered when calculating Matthew’s borrowing power.
Common Questions About Guarantor Loans
“Can the bank sell my guarantor’s house if I default on my loan?”
The short is answer is yes, technically. In rare cases, the bank could force the sale of your guarantor’s home, and all guarantors and borrowers must be aware of this.
However, lenders typically provide assistance and solutions for a considerable period before resorting to such measures. Maintaining open communication with your lender will help avoid this scenario.
“Are my parents/guarantors required to get legal advice?”
This one depends on the lender. Some require it, while others don’t. Some lenders allow you to waive the requirement; however, we recommend all guarantors speak to a solicitor to ensure they understand their legal responsibilities. Hello Home Loans can refer you to professionals we have used before and trust to get the job done if you’re not sure where to get advice.
“Do my guarantors have to be working?”
No. Each lender has different policies, but if your guarantor’s net asset position is comfortable, some lenders will accept retired or unemployed parents. Since the borrower is responsible for repaying the debt, most lenders don’t assess your parent’s income but need to understand what their assets, liabilities and living expenses are. A broker can assist in determining the likelihood of a lender accepting a guarantor.
“Do my guarantors have to have paid off their mortgage?”
No. If your guarantors have a home loan, ideally your broker would approach the same lender for a guarantor loan. If that lender doesn’t offer guarantor loans, your parent’s lender must then give permission for your new lender to put a second mortgage on the property. Not all lenders allow this, so it’s crucial you speak to a broker to understand your options.
Lenders have minimum equity requirements for guarantors — generally, they must have at least 20-30% equity after the guarantee has been provided.
“Who can provide a guarantee?”
Generally, parents, siblings or children. However, with good reasoning, some lenders may accept grandparents or other extended family members.
“Can I purchase with $0 or no deposit?”
Yes, you can borrow 100% of the purchase plus the cost associated with the purchase like stamp duty.
“What happens if my guarantors want to sell their home?”
If they are buying another home, you may be able to switch the security with your lender, leaving the loans untouched. If they are not purchasing again, the loans will need to be refinanced, and this may not be possible if you don’t yet have enough equity.
If your guarantor wants to sell in the near future, we caution against getting a guarantor loan and consider whether your guarantor would provide a gift to you instead. Talk to a broker about your options surrounding this.
“Do my parents/guarantors own part of my property?”
No, they have no legal ownership of your property.
“How do I remove the guarantee once I have enough equity?”
This is a straightforward process, generally done once you owe 80% or less than the current value of your home. Your broker can arrange with the lender to remove the guarantee, or you can refinance your home loan to another lender.
“Can I buy an investment property with a guarantee?”
Yes, both owner-occupied and investment purchases are allowed with most lenders. You’ll also gain the advantage of being able to consider future rental income from the investment property purchase which can increase your borrowing power.
Will my guarantors be affected by providing the guarantee?
While it won’t affect your guarantor’s borrowing power, providing a guarantee will reduce the available equity in their property, should they wish to access it later. Their financing options may also become limited as they’ll have a mortgage placed on their property by your chosen lender.
We highly recommend arranging a meeting with all parties before considering a guarantor loan so that everyone clearly understands how they will be affected and what their obligations are.
Can I get pre-approval when using a guarantor?
Yes, not only is pre-approval possible with guarantor loans, but Hello Home Loans strongly recommends getting pre-approval before you start negotiating on properties when using a guarantor. Getting pre-approved before you start house hunting outs you in the strongest negotiating position and helps avoid the disappointment of having a contract fall through due to financing issues.
How Do I Get Started with a Guarantor Loan?
Due to the complex nature of these loans, it’s important to speak to a broker as early as possible. Lenders have several requirements before approving these loans, and your broker must have a thorough understanding of the position of all borrowers and guarantors before providing any advice.
Don’t let this discourage you—guarantor loans are an excellent pathway to enter the property market sooner. Hello Home loans has proven success getting these loans approved. If you’d like to speak to one of our experts to get the process start, click the link below to arrange a time to speak with us.
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