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No one has your back quite like family. This is especially true when you need financial help to achieve your goals, whether it’s owning your first home, throwing a wedding or buying that dream car.

One way to access the help you need is through a guarantor loan: an arrangement where a family member helps you qualify for a loan by providing the lender with a guarantee. Here is the run-down on how guarantor loans work, as well as what you need to consider before applying for one.

Guarantor and co-borrower: what’s the difference?

A guarantor is someone who signs a guarantee on behalf of a borrower when they apply for a loan. By doing so, they become legally responsible for paying back the lender if the borrower defaults on the loan. This is different from a co-borrower, who signs a loan with someone and is jointly responsible for repayments. A guarantee is a separate but linked part of the loan – an extra form of security that makes the borrower a less risky prospect for the bank.

Due to the financial risk involved, the role of guarantor is usually limited to the borrower’s immediate family members. Some lenders allow an extended family or close friends to be a guarantor, although this can depend on the type of loan and how much you are borrowing.

Going guarantor on a home loan

With pressure mounting for those trying to enter the property market, it’s no surprise a home loan is one of the more common types of guarantor arrangements in Australia.

Guarantor home loans allow the guarantor to use equity in their own property as security for the loan. This means that while the borrower’s property is the main security for the home loan (like a traditional home loan), the lender will also take a mortgage over the guarantor’s property.

A guarantor doesn’t have to provide security for the entire loan amount; they can choose how much of the home loan they want to guarantee. If you decide to only guarantee a portion of the loan, if the borrower defaults on payments, you are only liable for that portion.

A guarantor can also be released from the loan once their borrower builds up enough equity in their property – in most cases, when the borrower reaches a loan-to-value ratio (LVR) of 80 per cent of the property’s value.

What are the benefits of having a guarantor on your home loan?

There are several benefits worth mentioning:

  • Avoid paying lender’s mortgage insurance (LMI). Home loans with an LVR of over 80 per cent are considered high risk by lenders. This means the borrower is required to pay for LMI: a type of insurance that protects the lender from a loss if you default on the loan. A guarantor can help you avoid this payment by lowering your LVR to below 80 per cent.
  • Increase the amount you can borrow. If you have a guarantor, some lenders will let you borrow slightly more than 100 per cent of a property’s purchase price, which can help with costs like stamp duty and legal fees.
  • Shop around for a better interest rate. Generally, loans with a high LVR come with a high interest rate. By using a guarantor, you can lower your LVR and gain access to home loans with more competitive rates.
  • Get into your property sooner. Having a guarantor means you can get a home loan faster than if you solely relied on saving for a sizeable deposit.

What are the risks of a guarantor home loan?

Agreeing to be a guarantor for someone comes with considerable financial risk, which is why most lenders restrict this kind of borrowing to members of the immediate family – usually a financially secure parent who owns their own home.

The biggest financial risk is liability. If a borrower can’t make repayments on their home loan, the guarantor is responsible for clearing the debt and their asset can be seized by the lender.

Being a guarantor also appears on a person’s credit file, which may affect their ability to get credit cards and other loans in the future. If you are considering being a guarantor for someone’s home loan, it is worth speaking to a financial adviser before you do.

Going guarantor on personal loans

Another way borrowers use a guarantor to secure funds they need is through a personal loan. This can be a suitable option if you are unable to meet the criteria for a loan on your own, or if you want to get a better interest rate by decreasing your risk to a lender.

There are generally two types of guarantor personal loans:

  • A secured guarantor personal loan is when a guarantor uses their asset – for example, their property, car or boat – as security for the personal loan. If the borrower defaults on the loan, the lender seizes the asset to pay back the money.
  • An unsecured guarantor person loan doesn’t require an asset, so tends to attract a higher interest rate as the lender is taking on a greater amount of risk.

Each lender has its own rules regarding who can act as a guarantor of a personal loan. Some accept extended family members and even close friends; others keep it restricted to members of the immediate family.

It’s worth taking the time to research which guarantor personal loan suits your needs – use the RateCity website to compare different products and interest rates on the market.

Going guarantor on a car loan

Buying a new car is another situation where a borrower might need the help of a guarantor, especially if they have a chequered credit history, or your dream car comes with a hefty price tag.

Being a guarantor for a car loan – for example, if your child has started a job and needs a car for transportation – can be a good way to financially help out a family member without having to actually outlay any money. For borrowers, it can help you avoid falling prey to car lenders with questionable practices.

What to consider before getting a guarantor loan

Taking out a guarantor loan from a lender is a big commitment – both for the borrower and the guarantor who is taking on considerable financial risk.

Before signing on the dotted line with a lender, think through the decision carefully and make sure you have all the information you need.

Here are some questions to help you cover all your bases.

  • What are the terms of the loan? Make sure you know exactly what you are getting yourself into by clarifying what type of loan you are applying for; what is being put up in security; whether the guarantee is for the total or a fixed amount; exactly how much the guarantor will owe if the borrower defaults; how long the borrower has to repay the loan.
  • What financial situation is the borrower and guarantor in? It is important for both parties to assess whether the guarantor can take on the financial risk, and if the borrower has the financial means to pay back the loan.
  • Is your relationship secure? In some cases, going guarantor can damage your relationship with your parent, child, sibling or close friend.
  • Does the guarantor understand the risks involved? Remember – when the loan can’t be paid back, a lender doesn’t have to take things further against a borrower before holding the guarantor legally responsible for the debt.
  • Have you sought advice? Before agreeing to go guarantor, it is recommended that you seek both financial and legal advice from a qualified lawyer and financial adviser.

Frequently asked questions

What if I can't pay off my guaranteed home loan?

If you can’t pay off your guaranteed home loan, your lender might chase your guarantor for the money.

A guaranteed home loan is a legally binding agreement in which the guarantor assumes overall responsibility for the mortgage. So if the borrower falls behind on their mortgage, the lender might insist that the guarantor cover the repayments. If the guarantor fails to do so, the lender might seize the guarantor’s security (which is often the family home) so it can recoup its money.

What does going guarantor' mean?

Going guarantor means a person offers up the equity in their home as security for your loan. This is a serious commitment which can have major repercussions if the person is not able to make their repayments and defaults on their loan. In this scenario, the bank will legally be able to the guarantor until the debt is settled.

Not everyone can be a guarantor. Lenders will generally only allow immediate family members to act as a guarantor but this can sometimes be stretched to include extended family depending on the circumstances.

What is a guarantor and guarantee?

A guarantor is a person, third party or organisation that agrees to guarantee your loan.

The guarantee is a legal assurance given by the guarantor to pay the loan if the borrower defaults and is unable to pay.

Can I take a personal loan after a home loan?

Are you struggling to pay the deposit for your dream home? A personal loan can help you pay the deposit. The question that may arise in your mind is can I take a home loan after a personal loan, or can you take a personal loan at the same time as a home loan, as it is. The answer is that, yes, provided you can meet the general eligibility criteria for both a personal loan and a home loan, your application should be approved. Those eligibility criteria may include:

  • Higher-income to show repayment capability for both the loans
  • Clear credit history with no delays in bill payments or defaults on debts
  • Zero or minimal current outstanding debt
  • Some amount of savings
  • Proven rent history will be positively perceived by the lenders

A personal loan after or during a home loan may impact serviceability, however, as the numbers can seriously add up. Every loan you avail of increases your monthly installments and the amount you use to repay the personal loan will be considered to lower the money available for the repayment of your home loan.

As to whether you can get a personal loan after your home loan, the answer is a very likely "yes", though it does come with a caveat: as long as you can show sufficient income to repay both the loans on time, you should be able to get that personal loan approved. A personal loan can also help to improve your credit score showing financial discipline and responsibility, which may benefit you with more favorable terms for your home loan.

How do I apply for a home improvement loan?

When you want to renovate your home, you may need to take out a loan to cover the costs. You could apply for a home improvement loan, which is a personal loan that you use to cover the costs of your home renovations. There is no difference between applying for this type of home improvement loan and applying for a standard personal loan. It would be best to check and compare the features, fees and details of the loan before applying. 

Besides taking out a home improvement loan, you could also:

  1. Use the equity in your house: Equity is the difference between your property’s value and the amount you still owe on your home loan. You may be able to access this equity by refinancing your home loan and then using it to finance your home improvement.  Speak with your lender or a mortgage broker about accessing your equity.
  2. Utilise the redraw facility of your home loan: Check whether the existing home loan has a redraw facility. A redraw facility allows you to access additional funds you’ve repaid into your home loan. Some lenders offer this on variable rate home loans but not on fixed. If this option is available to you, contact your lender to discuss how to access it.
  3. Apply for a construction loan: A construction loan is typically used when constructing a new property but can also be used as a home renovation loan. You may find that a construction loan is a suitable option as it enables you to draw funds as your renovation project progresses. You can compare construction home loans online or speak to a mortgage broker about taking out such a loan.
  4. Look into government grants: Check whether there are any government grants offered when you need the funds and whether you qualify. Initiatives like the HomeBuilder Grant were offered by the Federal Government for a limited period until April 2021. They could help fund your renovations either in full or just partially.  

What is a secured home loan?

When the lender creates a mortgage on your property, they’re offering you a secured home loan. It means you’re offering the property as security to the lender who holds this security against the risk of default or any delays in home loan repayments. Suppose you’re unable to repay the loan. In this case, the lender can take ownership of your property and sell it to recover any outstanding funds you owe. The lender retains this hold over your property until you repay the entire loan amount.

If you take out a secured home loan, you may be charged a lower interest rate. The amount you can borrow depends on the property’s value and the deposit you can pay upfront. Generally, lenders allow you to borrow between 80 per cent and 90 per cent of the property value as the loan. Often, you’ll need Lenders Mortgage Insurance (LMI) if the deposit is less than 20 per cent of the property value. Lenders will also do a property valuation to ensure you’re borrowing enough to cover the purchase. 

How do guaranteed home loans work?

A guaranteed home loan involves a guarantor (often a parent) promising to pay off a mortgage if the principal borrower (often the child) fails to do so. The guarantor will also have to provide security, which is often the family home.

The principal borrower will usually be someone struggling to find the money to enter the property market. By partnering with a guarantor, the borrower increases their financial power and becomes less of a risk in the eyes of lenders. As a result, the borrower may:

  • Qualify for a mortgage that they would have otherwise been denied
  • Not be required to pay lender’s mortgage insurance (LMI)
  • Be charged a lower interest rate
  • Be charged less in fees

What is a guarantor?

A guarantor is someone who provides a legally binding promise that they will pay off a mortgage if the principal borrower fails to do so.

Often, guarantors are parents in a solid financial position, while the principal borrower is a child in a weaker financial position who is struggling to enter the property market.

Lenders usually regard borrowers as less risky when they have a guarantor – and therefore may charge lower interest rates or even approve mortgages they would have otherwise rejected.

However, if the borrower falls behind on their repayments, the lender might chase the guarantor for payment. In some circumstances, the lender might even seize and sell the guarantor’s property to recoup their money.

Why does Westpac charge an early termination fee for home loans?

The Westpac home loan early termination fee or break cost is applicable if you have a fixed rate home loan and repay part of or the whole outstanding amount before the fixed period ends. If you’re switching between products before the fixed period ends, you’ll pay a switching break cost and an administrative fee. 

The Westpac home loan early termination fee may not apply if you repay an amount below the prepayment threshold. The prepayment threshold is the amount Westpac allows you to repay during the fixed period outside your regular repayments.

Westpac charges this fee because when you take out a home loan, the bank borrows the funds with wholesale rates available to banks and lenders. Westpac will then work out your interest rate based on you making regular repayments for a fixed period. If you repay before this period ends, the lender may incur a loss if there is any change in the wholesale rate of interest.

Cash or mortgage – which is more suitable to buy an investment property?

Deciding whether to buy an investment property with cash or a mortgage is a matter or personal choice and will often depend on your financial situation. Using cash may seem logical if you have the money in reserve and it can allow you to later use the equity in your home. However, there may be other factors to think about, such as whether there are other debts to pay down and whether it will tie up all of your spare cash. Again, it’s a personal choice and may be worth seeking personal advice.

A mortgage is a popular option for people who don’t have enough cash in the bank to pay for an investment property. Sometimes when you take out a mortgage you can offset your loan interest against the rental income you may earn. The rental income can also help to pay down the loan.

When do mortgage payments start after settlement?

Generally speaking, your first mortgage payment falls due one month after the settlement date. However, this may vary based on your mortgage terms. You can check the exact date by contacting your lender.

Usually your settlement agent will meet the seller’s representatives to exchange documents at an agreed place and time. The balance purchase price is paid to the seller. The lender will register a mortgage against your title and give you the funds to purchase the new home.

Once the settlement process is complete, the lender allows you to draw down the loan. The loan amount is debited from your loan account. As soon as the settlement paperwork is sorted, you can collect the keys to your new home and work your way through the moving-in checklist.

When does Commonwealth Bank charge an early exit fee?

When you take out a fixed interest home loan with the Commonwealth Bank, you’re able to lock the interest for a particular period. If the rates change during this period, your repayments remain unchanged. If you break the loan during the fixed interest period, you’ll have to pay the Commonwealth Bank home loan early exit fee and an administrative fee.

The Early Repayment Adjustment (ERA) and Administrative fees are applicable in the following instances:

  • If you switch your loan from fixed interest to variable rate
  • When you apply for a top-up home loan
  • If you repay over and above the annual threshold limit, which is $10,000 per year during the fixed interest period
  • When you prepay the entire outstanding loan balance before the end of the fixed interest duration.

The fee calculation depends on the interest rates, the amount you’ve repaid and the loan size. You can contact the lender to understand more about what you may have to pay. 

What are the features of home loans for expats from Westpac?

If you’re an Australian citizen living and working abroad, you can borrow to buy a property in Australia. With a Westpac non-resident home loan, you can borrow up to 80 per cent of the property value to purchase a property whilst living overseas. The minimum loan amount for these loans is $25,000, with a maximum loan term of 30 years.

The interest rates and other fees for Westpac non-resident home loans are the same as regular home loans offered to borrowers living in Australia. You’ll have to submit proof of income, six-month bank statements, an employment letter, and your last two payslips. You may also be required to submit a copy of your passport and visa that shows you’re allowed to live and work abroad.

What does unconditional approval from Aussie Home Loans mean for first time home buyers?

As an Aussie home loan first time home buyer, your loan application passes through multiple stages. Early in the process, you’ll receive conditional approval, which means the lender approves your loan application as long as you meet certain conditions. Some of these criteria include selling another property or repaying existing debt.

The next stage is unconditional approval which is the final decision from the lender. After considering all the relevant information, the lender is willing to offer you a certain amount to buy a specific property.

Unconditional approval is also known as formal or full approval but receiving this doesn’t mean you need to accept the money. If you choose to proceed and accept the funds, you’ll sign the loan documents to finalise the loan and receive the money. You can, at this time, clarify any doubts you have with your Aussie broker.

You’re likely to get conditional approval, sometimes called pre-approval, when you want to get clear on your budget. You’ll then apply for unconditional or formal approval once you’ve found a property and made an offer. This process will involve the lender reviewing your finances and the details of the property you wish to purchase to make sure you can repay a loan on that property.

As a first time buyer, it may help you with the purchasing process to seek pre-approval or conditional approval. This may speed up the final purchasing process and help you through the home loan process in steps rather than all at once.

Is a second mortgage tax deductible?

If you take out a loan to invest in a property, you can claim a tax deduction on the interest you pay as long as the property is earning income. In other words, if you rent the property for the entire year, you can claim a tax deduction for 12 months of interest payments. But, if you use the home for six months and rent it for the other six months, you can claim deduction only for 50 per cent of the interest amount.

You also get tax benefits for items that lose value over the years. But, the entire amount is not allowed as a tax deduction in the same year; instead you’ll have to claim a portion each year over a number of years. 

Additional borrowing costs, such as maintenance fees, stamp duty, offset account setting up fees, Lenders Mortgage Insurance (LMI), and establishment fees, can also be claimed as tax deductions.

Before you claim second mortgage tax deductions, it’s often worth checking with an experienced tax expert.

Does the family tax benefit count as income?

The family tax benefits are one of several government support payments that are not considered taxable income. Other such payments include child care subsidies, economic support payments, rent assistance, and carer allowances. If you file a tax return, you typically don’t need to mention such income on the return. However, some home loan lenders may accept family tax benefits as an income source when reviewing your home loan application. You’ll still need to meet other lending requirements, such as having a sufficiently high credit score and enough savings for a deposit before the loan will be approved.

Aussies receiving family tax benefits usually have an adjusted taxable income of no more than $55,626 a year. Alternatively, one spouse can be receiving income support payments from the government to be eligible. Most importantly, they need to have children dependent on them for care at least 35 per cent of the time. Children between the ages of 16 and 19 should be either full-time secondary students or have a somewhat comparable study load unless the government exempts them from these study requirements. 

What is the ANZ home loan settlement process?

Settlement is the procedure for the official transfer of ownership between the seller and buyer. It’s often done without the seller or buyers input but between both parties’ the financial and legal representatives.

Here is how the ANZ home loan settlement process works:

  1. The solicitor or conveyancer prepares the Transfer of Land document at least two weeks before the settlement date.
  2. The signed document is registered at the state or territory land registry office.
  3. Your solicitor or conveyancer will connect with the ANZ home loan settlement contact and the seller’s solicitor or conveyancer to finalise the date, time, and place of settlement.
  4. You must deposit any applicable amount into your ANZ account three days before the settlement date.
  5. After the settlement is completed, your solicitor or conveyancer will send you a Statement of Adjustment confirming the disbursal of funds from your home loan amongst the involved parties.

How does ANZ calculate early repayment costs?

If you have a fixed interest home loan, you’ll pay ANZ home loan early exit fees for partial or full repayment of the loan amount before the end of the fixed interest rate duration. These fees are also payable if you switch to another variable or fixed-rate loan.

The ANZ mortgage early exit fees can vary and you can get an estimate from the lender before you decide to prepay the loan. However, the exact early repayment cost can be determined when you prepay the loan.

The early exit fees are calculated after considering factors like the prepayment amount, the period left before the fixed-rate duration ends, and the change in the market rates since the beginning of the fixed-rate period. The early exit fees may not be charged if you’re paying off a smaller amount. You can check with ANZ to see how much you’ll have to pay.

How can I apply for a first home buyers loan with Commonwealth Bank?

Getting a home loan requires planning and research. If you are considering a home loan with the Commonwealth Bank, you can find the information you need in the buying your first home section of the bank’s website.

You can see the steps you should take before applying for the loan and use the calculators to work out how much you can borrow, what your monthly repayments would be and the upfront costs you’d likely pay.

You can also book a time with a Commonwealth first home loan specialist by calling 13 2221.

CommBank publishes a property report that may help you understand the real estate market. The bank has also created a CommBank Property App that you can use to search for property.  The link to download this app is available on the same webpage.

If you are eligible for the First Home Loan Deposit Scheme, CommBank will help you process your application. The scheme helps first home buyers to purchase a home with a low deposit. You can read details about this scheme here and speak with a CommBank home lending specialist to understand your options.

Can I borrow extra on my mortgage for furniture?

Yes, you may be able to borrow extra on your mortgage for furniture. This may be done by considering a home equity loan. A home equity loan may allow you to access the equity in your mortgage for furniture via:

  • A line of credit – A pre-approved credit limit based on your equity.
  • A lump sum payment – Like a persona loan, with equity in your home loan used as security.

If you want to avoid borrowing more money, consider accessing cash deposited into your offset account or drawing down on extra repayments with a redraw facility to fund furniture purchases.