A guarantor is typically a parent or close family member of the applicant, using the value of the equity in their own home as additional security. The guarantor may agree to guarantee the full mortgage or may choose a limited guarantee that only covers part of the loan, such as just the deposit.
This may see a borrower with, say, a 5% deposit have a parent come on to the loan to guarantee another 15% of the property’s value against a security, such as the family home. By guaranteeing a home loan or a deposit against an existing asset, like the family home, this allows the home buyer to significantly boost their home loan application and increase their chances of approval.
It’s important to note that taking out a guarantor home loan is a more time-consuming and complicated process than taking out an ordinary home loan. With an ordinary home loan, only the borrower needs to provide proof of identity, income, savings and assets, but with a guarantor home loan, the guarantor also has to take all of these steps.
The lender may conduct a valuation of the guarantor's property to confirm that they have sufficient equity to guarantee the loan. Also, the guarantor will have to provide a legal promise to pay off the mortgage if the primary borrower fails to do so.
As the home owner begins to repay their mortgage, they typically will repay the portion that the guarantor has secured first. As per the above example, if the guarantor only helped with the deposit and the borrower repaid 15% of the home loan, then the guarantor may be released from financial obligation towards the mortgage.