How does a guarantor mortgage work?

Security guarantee

The guarantor (sometimes called an “equity guarantor”) uses their own home as additional security for your loan in this form of guarantee. If the guarantor already has a loan on their own home, the bank may accept a second mortgage as security.

Security and income guarantee

Parents may be able to help their low-income earning children to buy their first home by becoming a security and income guarantor. The lender will use the parent’s property as added security and rely on their income to verify that the loan is sustainable.

Family guarantee/parent guarantee

When a guarantor is directly related to the borrower, it is a parental guarantee. Grandparents, siblings, and other relatives may also be considered as guarantors for certain cases. 

Limited guarantee

When only a part of the loan is guaranteed, it is a limited guarantee. This is most commonly utilised with security guarantors to limit the possible liability on the guarantor's property. Guarantees can be limited or infinite, depending on the guarantor's intentions and the lender's requirements.

Larger, more well-established banks are generally more likely to offer guarantor home loans than smaller lenders. These loans may also feature one or more of the following options:

Fixed or variable interest rate

Borrowers can choose between fixed and variable interest rates, just like a traditional home loan. 

Fixed-rate loans can often be useful for first-time home buyers as repayments are uniform and predictable. The duration of a fixed-rate period is generally between one and five years.

On the other hand, variable rate agreements provide often more flexibility because interest rates are based on market changes. As a result, borrowers who take out a variable rate loan can often more easily refinance and shift providers without needing to pay break costs.  

Extra repayments

Repaying more than the standard repayment amount each month has two advantages. For starters, paying your loan back faster can help you build home equity. Second, it may help your guarantor be released sooner. Keep in mind that you may only be able to make limited extra repayments with some home loans or you may need to pay a fee first.

Offset accounts

An offset account works similarly to a typical bank account, except that its balance effectively reduces the amount of your loan principal that is subject to interest. This means you can be charged less home loan interest, potentially paying the loan off faster and saving you money over time.

If paying the 20% deposit on your future house is your biggest barrier to homeownership, a guarantor can support you to secure your home loan application so you can own a home sooner. Saving a down payment on a home might take years, if not decades, if you're a newcomer to the workforce. However, if you can meet the required home loan repayments, having a guarantor on your side can help you acquire additional funds and accelerate your first step up the housing ladder.

One of the most significant advantages of having a guarantor on your mortgage is that you may be able to avoid paying Lenders Mortgage Insurance (LMI). This policy protects the lender if a borrower defaults, but it also adds to your expenses as the lender typically passes on the cost of LMI to the borrower. A guarantor can help to mitigate the lender’s financial risk, reducing the cost of or even eliminating the need for LMI.

You usually have a limited number of guarantor home loan options available to you, so you may not always be able to get the mortgage options you want when making your comparison. 

Many banks only allow close family members to act as guarantors, meaning you may need to consider other options if your parents can’t or won’t assist you. You and your guarantor may also face legal consequences if you and your guarantor fail to pay back the loan. 

Considering everything you need to bear in mind when opting for a guarantor loan, it may be a good idea to consult an expert such as a mortgage broker. They can help you understand the benefits and risks that you may encounter and ensure that you make the right decision.