What is a Guarantor Home Loan?

What is a Guarantor Home Loan?

When it comes to buying property, there are many different avenues that can help you secure the support you need. 

If you’re struggling to meet minimum deposit requirements, a guarantor home loan could help you break into the property market! However, it is important that you understand what this really means and what potential pitfalls to watch out for. 

What is a guarantor home loan, and is it the right choice for you? Here is everything you need to know before making a decision.

What is a guarantor home loan?

A guarantor home loan is a loan that is secured not only by your own deposit by also by the equity in someone else’s property. 

Instead of assessing your borrowing power solely on your financial situation, as in the case of a standard home, a guarantor arrangement allows you to prove serviceability based on someone else’s ability to step and repay the loan if you are unable to do so. Often, this person is a family member.

How a guarantor agreement works

In a guarantor loan, another person signs an agreement to use their equity in their own property as collateral towards your purchase of another property. Instead of guaranteeing the whole loan, your guarantor might just put forward enough equity to cover the minimum deposit amount. 

Your guarantor doesn’t have to withdraw funds or pay anything towards your loan from the outset. Their equity simply exists as a guarantee so that if things go wrong, your lender can get its money back.

In the event that you default on your regular loan repayments, your lender can pursue your guarantor for the pre-determined guarantee amount to pay back what you owe. 

Benefits of a guarantor

Having a guarantor can have a number of benefits! 

The security of a guarantor often allows you to borrow more than you would be able to alone. By increasing your borrowing power in this way, a guarantor can help you explore more purchasing options and more easily find a home you really love. 

A guarantor may also help you score a better loan package! You may be able to benefit from a better interest rate or even lower fees. 

Finally, having a guarantor can help you break into the property market when factors are working against you. If you have a poor credit history, a guarantor may be the difference in whether or not you can secure the loan you need. 

Disadvantages of a guarantor

There are also some disadvantages associated with having a guarantor.

Not all lenders offer guarantor home loans, so you’ll need to shop around for someone who can help. You may also be subject to higher-than-usual interest rates or fees, depending on the loan package you opt for. 

It can also be difficult find a financially secure guarantor who is able and willing to help you. It’s important to remember that your guarantor is trusting you. If you default on your debt and your guarantor is forced to pay back what you owe, this could put major strain on relationships. 

What should you do?

Is a guarantor arrangement right for you? That depends! It’s important to think carefully about your options. 

If you do choose to have a guarantor, speak candidly with the person whose help you’ll be relying on. You also need to be certain that you protect a guarantor’s equity by ensuring that you can consistently make regular loan repayments. 

Need help setting up a guarantor arrangement for your home loan? Discover the best mortgage brokers Melbourne has to offer on OurTop10.


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