The rise of guarantor home loans among first-home buyers

There has been a notable increase in the use of guarantor home loans.

A guarantor home loan means a close family member — usually one or both parents — offers their own property as security for part of the loan. This can enable the buyer to borrow up to 100% of the purchase price (and sometimes more, to cover additional costs like stamp duty), without having to pay lenders mortgage insurance (LMI).

Advantages of guarantor loans

• Buyers can enter the property market sooner without needing to save a full deposit.
• Avoiding LMI can save buyers tens of thousands of dollars.
• Buyers might have access to a wider range of loan options with more competitive interest rates.

Considerations with guarantor loans

• If the buyer struggles to keep up with repayments, the guarantor may be responsible for the guaranteed portion of the loan.
• The guarantor’s property could be at risk if the buyer defaults.
• The guarantor’s ability to borrow may be affected while they are tied to the loan.

Points to reflect on — for buyers and guarantors

Before proceeding with a guarantor loan, buyers should carefully assess whether they can manage repayments now and in the future. It’s also important to consider how long the guarantee will be needed — usually, it can be removed once the buyer has built 20% equity in the property.

Potential guarantors need to understand the financial and legal commitments involved. It’s wise to seek advice from a mortgage broker, a financial professional, and a lawyer. Guarantors should also have an open and honest discussion with the buyer about what could happen if difficulties arise.

Case study

Mia wants to purchase a $700,000 unit but has only $35,000 in savings. Her father uses the equity in his home to guarantee 20% of the loan ($140,000). This helps Mia buy the unit immediately, without using all her savings or paying LMI. Mia plans to build 20% equity in the property within five years, at which point she will refinance and remove her father from the guarantee.

Why guarantor loans are becoming more common

As property prices continue to rise, more first-home buyers are turning to family support, commonly known as the Bank of Mum & Dad. This means parents often have more equity available to assist their children.

If you’re considering a guarantor loan, whether as a buyer or a guarantor, contact Mortgage Suite Baldivis to discuss your options and find the right solution for your situation.