Guarantor Home Loans [How to borrow 105% LVR]
In this post, I’m going to show you EXACTLY how to borrow 105% of a properties value.
(Without needing a lot of savings)
In fact, this is the exact process that we have used to help 102 home buyers in the last year with getting a guarantor home loan.
So if you want to buy your first home faster, and borrow up to 105% LVR of a properties value then you’ll love this new Guarantor Home Loan guide.
Let’s dive right in…
How we helped Zhara with going from “Renting” to “Owning!”
Before we get into today’s Guarantor Home Loan tutorial, a quick backstory:
When Zhara bought her first home, she had hardly ANY deposit.
Fast forward to today, and she is the proud owner of a 2 bedroom unit in Lutwyche in Brisbane:
And is loving it:
And because Zhara got a guarantor home loan she didn’t need to have a lot of savings and was able to buy her apartment before prices went up and stop wasting money on rent. Winning!
Now that you can see that I know what I’m talking about, let’s dive into the steps that we used to get these results.
- Step #1: Guarantor Loan Requirements
- Step #2: Borrowing Power with Guarantor Loans
- Step #3: Guarantor Loan Calculator
- Step #4: What are the Responsibilities Of Becoming A Guarantor?
- Step #5: Removing the guarantor
- Bonus: Example of a Guarantor loan
Step #1: Guarantor Loan Requirements
The Guarantor Home Loan process begins with having someone that can help you out.
A guarantor needs to own their own property, either a house or an investment and they need to have equity in it.
This is because your bank will take security over a portion of their property in place of your deposit allowing you to borrow 105% of the purchase price.
Here are the exact requirements to find an eligible guarantor:
- ✅ Needs to be from your immediate family, so your parents, siblings or grandparents. Some banks will also allow de facto partners, or in some cases uncles or aunts depending on their relationship with you.
- ✅ Guarantors property needs to be in Australia, the banks will not accept any property located overseas and the guarantor needs to be an Australian or New Zealand Citizen.
- ✅ There needs to be enough equity in their home, typically the guarantor will need to Lowe less than 80% of the property value on their home loan. We’ll go into this more shortly.
- ✅ Your guarantor needs to be currently working, a lot of banks will not allow a security guarantor from a retired or elderly guarantor. There are some exceptions, we have some banks that will accept self-funded retirees provided they get legal advice and have a reasonable exit strategy.
- ✅ You need to be over 18 years old to apply for guarantor home loan
Unacceptable guarantors include:
- ⛔️ Friends
- ⛔️ Work associates
- ⛔️ Previous spouses, or de facto partners
- ⛔️ Unrelated people who do not have an immediate relationship with you.
Do I need to show savings with guarantor loans?
Although you can access over 100% of the purchase price from lenders using a guarantor loan, some lenders will still want to see at least 5% of the purchase price in what is called genuine savings.
This is money that you have saved away yourself, but don’t worry there are some exceptions like using rent that you have paid as genuine savings.
You can talk to us today about which lenders will not require genuine savings.
Am I able to get a Guarantor Loan if I have owned a property before?
The majority of banks that can do guarantor loans allow you purchase your first home, there are only a handful of lenders that will accept second home buyers because they believe they should have a good enough asset position to buy on their own.
Obviously, this is not fair for people who have gone through a divorce or have been sick in the past but don’t worry we work with a few banks who are less conservative on guarantor loans.
Is a guarantor home loan the same as a family pledge loan?
Good news, a guarantor home loan is the same as a family pledge loan or a family security guarantee.
Different banks just call them different names:
- 🏦 Commonwealth Bank call their Guarantor Home Loans a Guarantor Support loan;
- 🏦 St George Bank call theirs a Family Pledge Loan;
- 🏦 ANZ Bank’s guarantor home loan is called a Family Security Guarantee;
- 🏦 Westpac Bank call theirs guarantor home loan a Parental Guarantee Loan;
- 🏦 Macquarie Bank, IMB Bank, Heritage Bank, NAB, Bankwest, Gateway Bank call theirs a Family Guarantee Loan.
Although the banks use different names, the products operate in the same way – using your parent’s property as security to help you borrow with a minimal deposit.
The big difference between the banks is going to be your borrowing capacity (which we’ll cover shortly, this can make a $100k difference 😳), the maximum LVR they will allow (not all banks will go to 105% LVR) and the requirements for your parents as guarantors – some banks will not put a loan against your home.
Feel free to get in touch and see which lenders will work for your individual situation, or call us on 1300 088 065.
What about an investment property?
One investment property will be accepted by only two or three lenders in Australia supported by a guarantor.
Buying multiple investments is not generally accepted due to creating unnecessary risk. If the guarantor is in a strong financial position, then multiple investments could be an option.
Benefits of a guarantor loan?
- ✅ The most obvious one is, no deposit is required: Being able to borrow over 105% of the property value means you do not need to have your own savings to purchase your first home.
- ✅ Receive discounted interest rates: The banks consider guarantor home loans lower risk lending as they have your parents property as security, so they will give you better interest rate discounts.
- ✅ Save money with no LMI premium: Lenders Mortgage Insurance can be several thousand dollars which you need to pay if you have less than a 20% deposit but completely avoided with guarantor home loans.
- ✅ Consolidate minor debts: Several banks will allow you to consolidate minor debts like credit cards or personal loans provided it fits within the 105% LVR.
- ✅ Limit the size of the guarantee: Your guarantor’s property will secure the deposit portion of your purchase which you can limit to 20-25% of the purchase price.
Step #2: Borrowing Power with Guarantor Loans
Here’s the truth:
If you want to get a guarantor loan, you need to have enough borrowing power.
The maximum amount the banks will lend you is known as borrowing capacity.
And borrowing capacity is a HUGE factor when you are buying a home.
What is my borrowing capacity?
Borrowing capacity is often referred to as borrowing power, this is the maximum amount a bank will lend to you based on your income and ability to repay that loan.
Your borrowing capacity will ultimately depend on how much income you are earning, how much debt, credit cards and other liabilities you have and what your ongoing living expenses are.
Broadly speaking, the banks will lend between 5 to 6 times your income. So if you are earning $50,000 you might be able to borrow up to $300,000.
For a more specific example, we have shown how much a single person could borrow if they were earning $75,000 per year and had no credit cards, AfterPay or personal loans.
To find out what your borrowing power is, get in touch with our team or call on 1300 088 065 and we can let you know.
Can I get a bigger mortgage with a guarantor?
You can get a bigger mortgage with a security guarantee because the bank will take your new home, and your parent’s property as security to lend against.
Meaning in some cases you can borrow 105% of the purchase price, so if you were buying a home worth $500,000 you could borrow up to $525,000 with the help of a parental guarantee.
Compared to a regular stand-alone mortgage which would only allow you to borrow a maximum of 95% against your home, or in the case of a $500,000 purchase up to $475,000.
Can I use my parent’s income as part of my guarantor loan?
Unfortunately, income guarantees do not exist anymore, this is where you could use your parent’s income in your home loan application for people who had insufficient income to purchase a property.
These days banks will only allow a security guarantee, meaning they can only use your parent’s property instead of you saving up a deposit.
Does being a guarantor affect your mortgage application?
Being a guarantor does not affect your mortgage application because you are only providing a limited security guarantee. Put another way, while your property is being used as a security guarantee towards a loan,
Step #3: Guarantor Loan Calculator
Here’s how to work out how much you can borrow with a guarantor home loan:
How much can I borrow with a guarantor mortgage?
- ✅ First Home Buyers: You can borrow up to 105% of the properties value
- ✅ Construction or Building Loans: 105% of the land price, and construction price.
- ✅ Refinancing Loans: Up to 100% of your properties value is available
- ✅ Consolidating Debt, as well as a purchase: In some cases, you can access 110% of the properties value.
- ✅ Investment Loans: You can access 105% of the investment properties value.
Is it possible to borrow over 105%?
Previously some lenders have lent up to 120% of the purchase price on a guarantor home loan, unfortunately, these loans are no longer available in the market.
As we covered above, in most circumstances you can borrow up to 105% of the purchase price which generally covers the purchase, stamp duty and other costs.
In some situations, you can lend up to 110% to consolidate some existing debts, but these debts generally cannot be more than 5-10% of the purchase price.
Guarantor home loan calculator
The guarantor home loan calculator can help you determine the size of your limited guarantee and see if you are going to have any troubles applying with different banks.
To do this, you first need to calculate how much the limited guarantee against your parent’s property will be.
What does a limited guarantee mean?
A limited guarantee reduces the overall risk taken on by your guarantors who are helping with your home loan. The size of the limited guarantee is calculated by taking the total loan amount, dividing it by 0.8 and then subtracting that from the property price.
For example, if you were borrowing $580,000 to purchase a home worth $600,000 you could work out the size of the limited guarantee:
Limited guarantee = (loan amount / 0.80) – purchase price
- ✅ The total borrowing is $580,000
- ✅ $580,000 divided by 0.80 = $725,000
- ✅ $725,000 minus the purchase $600,000 = $125,000
In this situation, your parent’s guarantee would be limited to $125,000 – instead of the total lending being $580,000.
These calculations work out the limited guarantee assuming you keep your loan’s LVR at 80%, so you’ll need to double check your parent’s property has enough equity to cover this amount being $125,000.
Don’t worry if this is getting confusing, you can speak with one of our Expert Mortgage Brokers and see if you can qualify for a guarantor home loan. Fill in a quick form, or give us a bell on 1300 088 065 and one of our specialist mortgage brokers will contact to chat about your situation.
Step #4: What are the Responsibilities Of Becoming A Guarantor?
In this section I’ll show you everything you need to know about becoming a guarantor.
(I’m talking to you Mum and Dad, and any prospective Home loan Guarantors out there)
I’ll answer all of your questions answered around roles, responsibilities and requirements for becoming one.
Sound good? Let’s dive right in…
What is the role of a guarantor?
Getting a guarantor home loan is becoming more and more popular due to it being a great way for first home buyers to enter the property market with a lower deposit.
So what’s the role of a guarantor on this type of home loan?
A guarantor uses their current property as security for their son or daughter wanting to get a new loan.
This then becomes a ‘guarantee’.
After part of the loan has been paid off, then the guarantee can be removed. Or if you’re lucky and the property value increases, this creates further equity in the property, which means the guarantee can be removed sooner.
And the responsibilities?
Not everyone qualifies to be a guarantor, in most cases, it’s when parents or a close family member wants to help a buyer get into the property market sooner.
Simply put, if the buyer fails to make their mortgage repayments, the guarantor is required to pull through and help.
But there are a few tips for you, to help reduce the risk and minimise responsibilities including:
- Limit the size of the guarantee – cap the amount of money you’re willing to guarantee on the loan to minimise risk.
This creates somewhat of a safety net because it is an amount you’ve agreed on.
So let’s say your daughter is looking at a house worth $450,000 and you’re willing to guarantee up to $100,000, then that is all you’re required to cover, no more.
Even if she eventually has to sell the property, and it only sells for $300,000, you’ll still only be liable for the $100,000, not the gap in the value that’s dropped ($150,000). So essentially the other $50,000 is no longer your responsibility.
What about the risks of being on a guarantor home loan?
The concept of a guarantor loan in some people’s eyes seem a little too good to be true, but there is a risk involved.
So while a guarantor loan pretty much cuts out the requirement for a buyer needing to have a deposit, the risk is that the guarantor is putting the value of their home against the new buyer’s property.
Basically, if Susie misses her mortgage repayments or fails to meet loan obligations, then it comes back onto her guarantor to sort it out.
Depending on what kind of assets the guarantor has, this is where the problems can begin.
So whatever the amount of the loan the guarantor has agreed on – they will be responsible for.
I’ve guaranteed $100,000 on my daughter’s home loan and now have to cover the debt, but I don’t have enough equity. What can I do?
So obviously this is the worst-case scenario. And if you’re at risk of this situation, then it really isn’t recommended you go down the path of helping with a guarantor home loan to begin with.
But in this situation, you’d have a few options including, taking out a personal loan, second mortgage or lowering your home loan repayments in order to keep your home loan to help you pay off the debt faster.
What is the Loan structure and fees for a guarantor
To understand a guarantor loan, the loan structure is what sets it apart.
So if you’re not fully aware of the fees and structure required to be followed, then you could be in trouble.
Fortunately, we can help make things super simple for you.
And in this section, I’m going to lay out everything you need to know about the loan structure and fees for a guarantor.
What fees do I need to pay as a guarantor?
What’s special about a guarantor loan is that the buyer is eligible to borrow up to 100% of the property price helping your child get into the property market sooner.
Your son or daughter will pay the bank fees, and mortgage registration fees. So as a guarantor you don’t need to cover those standard home loan fees… but:
You may need to pay to get independent legal advice so you fully understand your obligations on the guarantor home loan.
When is the guarantee removed?
This comes down to how quickly you son or daughter buyer pays off the loan, or if the property value increases.
Removing a guarantor is relatively easy.
If your son or daughter has managed to pay off a fair chunk of their loan, the sooner the guarantor will be released.
We recommend sitting down with your children and going through the payment plan to have a clear timeframe in mind, so that both parties involved are aware of the loan time frame and when they aim to release the guarantor.
Which brings us to step #5…
Step #5: Removing the guarantor
The reality is guarantor loans are great for getting you into the market quickly, but you want to aim to remove that guarantee within 5 years of owning the property.
Removing your parent’s guarantee is going to come down to a few different factors, and usually, the best time to remove them is when your LVR is under 80% of the properties value.
This is the best time to remove the guarantors from your loan as you will avoid paying lenders mortgage insurance, you qualify for better interest rates being under 80% LVR and the process generally involves less paperwork.
How long does a guarantor stay on a mortgage?
By default the guarantee is on the mortgage for the total loan term, being 25 to 30 years! In other words, if you never ask to have it removed it will stay on there for as long as you have your loan.
What are the steps in removing a guarantor from the mortgage?
The exact process of removing a guarantor from the mortgage varies from bank to bank.
But in general, you will need to go through these steps to remove a guarantee.
- ✅ Contract your mortgage broker to review your financial situation
- ✅ Arrange a bank valuation
- ✅ Confirm the total loan amount
- ✅ Make sure you meet the lender’s criteria
- ✅ Submit a partial release, or internal refinance
- ✅ (Wait 5-8 days for the bank to process)
- ✅ Complete property release or internal refinance
- ✅ All done, your parents can pick up their title from the bank
The biggest difference in the process is in step #5: If you have an 80% LVR loan, you can submit a partial release.
If you have a 90% LVR loan, you will need to complete an internal refinance and loan will be subject to lenders mortgage insurance approval.
Read More: Removing a Guarantor from Mortgage
Bonus: Example of a Guarantor loan
Cherise had been renting for a few years, and after moved a few times in the last 12 months she wanted to get her own home.
She found a perfect 1 bedroom unit not far from where she had been living, and the property was going for $400,000. Cherise knew if she didn’t jump onto it quickly she could miss out.
The tough thing was because she had been renting for a few years she wasn’t able to save up a big deposit, she would need at least 5% deposit or $20,000 plus her costs to purchase the property to get a home loan – so she was stuck, and wouldn’t be able to stop renting.
Cherise’s guarantor home loan
Instead of having to save up $20,000 plus the costs Cherise spoke to her parents who owned their home which was worth $500,000 and had a $200,000 mortgage on it.
Luckily for Cherise, she was able to use her parent’s property as guarantor security, she was able to borrow 105% of the purchase price to cover her home loan and other costs to get into her new home!
Not to mention she saved well over $15,000 in Lenders Mortgage Insurance costs she would have otherwise paid if she had only a 5% deposit.
Why did a guarantor loan work for Cherise?
- ✅ Cherise was able to buy the property quicker, without having to wait and save a deposit
- ✅ She was able to save $15,000 but not paying mortgage insurance
- ✅ With her leftover savings she was able to buy a bunch of new furniture for her new place, and even go on an overseas holiday to Mexico.
We can help you out!
A lot of mortgage brokers and bankers out there rarely see guarantor loans, but we get them approved every day. We know which banks like dealing with them, how to get your home loan approved quickly and how to set them up to protect you and your parents who provide the guarantee.
If you would like to speak with a mortgage broker please call on 1300 088 065 or enquire online and one of our expert mortgage brokers will give you a call to discuss your situation.