A Guarantor Loan is like a normal home loan except that somebody has agreed to offer a guarantee to the lender that the loan will be repaid. This type of loan is most often used by first home buyers with little or no deposit, who then asks their parents or another family member to guarantee their application in order to get approval.

The guarantor is liable in the event that the borrower cannot repay the debt. As a general rule the lender will sell the borrowers property in the event that the loan cannot be repaid and only then if the loan isn’t repaid will they ask the guarantors to pay the remaining amount.

Why do people use Guarantor Loans?

• You can borrow 100% or more of the purchase price.
• You do not need to have saved a deposit.
• You will pay no Lenders Mortgage Insurance, savings yourself thousands of dollars!
• You can get the same professional package and basic loan discounts.
• Lenders are less conservative and so you are more likely to get approval.

In particular over 60% of first home buyers get some type of help from their parents when buying a property. This is usually in the form of a giving them a deposit as a gift or by guaranteeing their home loan.

What security is required?

Although there are several types of guarantees, the most common is for the lender to take security over some real estate owned by the guarantor. This is completed by taking a mortgage over that property or if the guarantor already has a loan on their property then some lenders can take a 2nd mortgage.
The amount of the guarantee can be limited, usually to around 25% of the total loan amount. This then gives the lender the comfort to lend 100% of the purchase price as they have sufficient security to cover the loan.

How does a bank arrange a 2nd mortgage?

If your guarantor has a loan on their property already then the lender will need to take a 2nd mortgage behind the existing loan. To do this they send you some additional paperwork once the loan is approved.

The guarantor will sign a consent letter & a deed of priority which can be sent by the lender to the guarantor’s existing lender requesting them to allow a 2nd mortgage to be taken behind the existing loan. They then consent to the request and liaise with the new lender to arrange the 2nd mortgage. Most of the time they will charge a consent fee of around $250 which is paid by sending a cheque for this amount along with the consent letter.

Sound complicated? Don’t worry it is simpler then it looks as we and the lenders take care of it all behind the scenes.

Reducing the Guarantors Risk

We are strong believers in this method of financing the purchase of a home. That being said we are aware that the risk for the guarantor has to be reduced as much as possible. Please read our page about reducing the risk of going guarantor.

Removing the Guarantee

The guarantee doesn’t have to be in place for the full 30 years of the loan. In most cases the guarantee is removed approximately 5 years after the loan was first advanced. Find out more by reading our page about removing the guarantee.

Speak to an expert

We are specialist mortgage brokers that work with guarantor lending on a day to day basis. Please enquire online to speak to one of our staff who can assist you further.