How long does a guarantor stay on a mortgage?

If you're a first-time homebuyer, your parents may be able to offer a family guarantee to help secure your home loan. While this can be an effective way to get into the property market, it’s important to know when and how to release your parents from this responsibility.

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A guarantor may be needed when a borrower doesn’t meet the lender's usual requirements, such as not having enough deposit or a strong enough credit history. The guarantor provides additional security by using their property or savings as collateral, helping the borrower secure the loan.

However, if the borrower defaults, the guarantor becomes liable for repaying the loan, and may even risk losing the collateral they offered. This can create significant financial pressure on the guarantor, so it's essential to fully understand the responsibilities involved.

Since the guarantor’s property is at risk, they may face limitations in their financial plans, such as being unable to sell or borrow against their own property. This situation can also create tension or stress within personal relationships, especially between family members. To avoid these pressures, you could consider releasing the guarantor from the loan as soon as your financial situation improves.

While there’s no fixed rule on the duration, most guarantors stay on a mortgage for two to five years. This depends on two factors - how quickly you can pay the loan and how rapidly the value of your property increases.

Bear in mind that removing a guarantor from a mortgage is not an automatic process. It can only be achieved through internal refinancing.

Simply put, you can decide when to remove your guarantor from your home loan. However, you’ll need to take certain steps to formally remove the guarantor, typically by building enough equity or improving your loan-to-value ratio (LVR). Further, release of a guarantor from the mortgage is not automatic, and you need to follow a process for releasing a guarantor from a mortgage.

Lenders typically have specific conditions for removing a guarantor from a loan. These may include:

• Timely repayments: Consistent loan repayments for the last six months.
• LVR: Your loan should ideally be below 90% LVR, but to avoid Lenders Mortgage Insurance (LMI), you’ll likely need to bring your LVR under 80%.
• Financial position: Your income, credit history, employment, and other criteria must align with your lender’s policy.

In addition, you will need to check whether your lender has any further specific requirements.

There is no set timeline for when it's best to remove a guarantor from a home loan, as it depends on personal financial circumstances. However, many opt to release their guarantor when the loan balance is below 80% of the property's value.

Reaching under 80% LVR can help you avoid Lenders Mortgage Insurance, saving significant costs. Additionally, it's worth remembering that your guarantor may need access to their home equity for other purposes. Keeping their property tied to your loan can cause stress, so releasing them as soon as your financial position allows can ease the strain on your relationship.

The steps involved in removing a guarantor from a mortgage differ from bank to bank. You will generally need to do the following:

• Assess your financial situation. Your mortgage broker can help you in this process.
• Ensure you comply with your lender’s criteria.
• Once you’re sure you meet the lender’s criteria and request a release, the lender is likely to carry out a property valuation.
• The next step generally depends on how much of your mortgage is outstanding. If your LVR is below 80%, you can submit a partial release. Otherwise, you may be required to complete an internal refinance.

Once you submit the documents, check how long your lender will need to process your request. After the formalities are completed, the guarantor is free to pick up their title from the bank.

Having a guarantor on your home loan can help you save, especially on LMI costs when borrowing with a low deposit. However, when it’s time to release the guarantor, certain costs may arise. These can include fees for property valuation, bank fees for any administrative tasks, and potential government fees for transferring deeds. Further, if you attempt to release the guarantor before building enough equity, you might need to pay for LMI, too.

Most borrowers tend to release the guarantor when their LVR falls below 80%, as this helps avoid LMI costs. Additionally, releasing the guarantor when your LVR has improved may qualify you for a lower home loan rate, providing further savings.

Beyond financial benefits, removing the guarantor sooner can ease the burden on your relationship, as it frees them from the responsibility and risk associated with the loan. This can help maintain a positive and stress-free relationship moving forward.