Understanding mortgage guarantor criteria

Are you unable to make a deposit because you do not have sufficient funds? Is your ability to repay a loan being questioned by a lender? If that's the case, you could seek a guarantor loan to buy a house.

What is a home loan with a guarantor?

A guarantor home loan enables you to enlist the help of family members or, in some instances, someone close to you, to 'guarantee' the loan. This means that if you cannot repay the debt, they will be held liable to pay. A guarantor is typically required to provide equity as collateral for a portion or all of your loan amount.

You'll still be responsible for paying regular mortgage repayments (including any interest and fees) as the homebuyer. If you are unable to meet your repayments, the person who guaranteed your home loan (called the guarantor) may be held accountable to cover them.

A guarantor loan works similarly to a regular home loan in that you take out a loan and repay it. However, the guarantor's equity serves as supplemental collateral if something goes wrong, which means the bank would only need to seize your home if neither you nor your guarantor can make the repayments.

There's also the possibility that your guarantor could guarantee a portion of the loan, so that once you've paid off that portion, they should no longer be at risk if later on you find yourself unable to make any further payments.

What are home loan guarantor requirements?

The key consideration with guarantor home loans is that the guarantor must be somebody who has a close relationship with the buyer, which would typically mean immediate family members such as:

• Parents
• Siblings
• Grandparents
• Your partner

The lender will take into account several factors when determining mortgage guarantor criteria. While the exact requirements may vary with differnt lenders, some common requiremnts are that the guarantor must: 

• Have equity in their home and a steady income.
• Have an excellent credit score.
• Be an Australian citizen or a permanent resident of Australia.
• Be between the ages of 18 and 65.

What is the maximum amount you can borrow with a guarantor?

With a guarantor loan, it may be possible to borrow up to 100% of the home's purchase price, or even slightly more. However, even if there is a guarantee, most lenders will only lend 100 per cent of the property's value, while some may offer slightly higher.

Technically, there is no limit to the size of a loan. If you want to borrow more than $1 million, though, you'll likely have to meet more stringent credit requirements.

When will you be able to remove the guarantor?

Whether or not the guarantee can be removed will depend on any increase in the property’s value and how many additional repayments you make. Many borrowers are able to remove the guarantee between two and five years after taking out the mortgage.  

The exact criteria for having the guarantor removed from the loan may vary by lender, though you may be considered if:

• You can make payments on your own.
• Your loan amount is less than 90% of the property's value (though you may still have to pay Lender's Mortgage Insurance unless your loan amount is less than 80% of the property's value)
• You have not missed any payments in the previous six months. 

Conclusion

Since there are various factors to consider when applying for guarantor loans, visiting a professional mortgage broker may be worth considering. Lenders are often extra cautious when it comes to guarantor loans, and their guarantor loans have varying terms and conditions. Aside from that, a professional can assist you in devising a strategy for removing the guarantee in the shortest amount of time possible.

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