How does a guarantor mortgage work?

Security guarantee

The guarantor utilises their home as additional security for your loan in this form of guarantee. In most circumstances, if the guarantor already has a loan on their home, the bank will accept a second mortgage as security.

This form of guarantee is frequently used when first-time home buyers with good credit buy a home with no deposit. Certain lenders refer to the guarantor as an "equity guarantor."

Security and income guarantee

A parent assisting their son or daughter who is a student or has minimum income to buy their first home is known as a security and income guarantor. The lender will use the parents' 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 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.

Now that you know how guarantor home loans work, it’s important to note that larger, well-established banks are more likely to offer guarantor home loans than smaller lenders. The following offers may be available:

Fixed & variable rate

Borrowers can choose between fixed and variable interest rate periods, 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 easily shift providers without needing to pay break costs.  

Extra repayments

Repaying more than the set repayment amount each month has two advantages. For starters, it will help you build home equity, while allowing you to pay back your loan faster. Second, it may enable your guarantor to be released sooner. Extra repayments may, however, be subject to a fee by some institutions. So before putting more money into your repayment plan, do your homework.

Offset accounts

An offset account works similarly to a typical bank account, except that its positive balance reduces the amount of your house loan principal that is subject to interest, possibly saving you hundreds of dollars over the loan's life.

With a guarantor home loan, you'll be able to own a home sooner. Saving for 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). The goal of LMI is to protect the lender in the event that a borrower defaults, but it also adds to your expenses. A guarantor can help to mitigate this risk and even eliminate the need for LMI.

You can obtain funds without making the obligatory 20% deposit. If paying for the 20% down payment on your future house is your biggest barrier to homeownership, a guarantor can support you to secure your application.

You usually have a limited number of options when taking out a guarantor home loan. Most banks only allow family members to act as guarantors, which means you'll have fewer options if your parents refuse to or cannot 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. They can help you understand the benefits and risks that you may encounter and ensure that you make the right decision.