The rise of guarantor home loans among first-home buyers

New data shows a sharp increase in the use of guarantor home loans.

A guarantor home loan involves a close relative – generally one or two parents – offering their own property as security for part of the loan. This can allow a buyer to borrow up to 100% of the purchase price (and sometimes even more, to cover costs like stamp duty), without needing to pay lenders mortgage insurance (LMI).

The pros of guarantor loans

• Buyers can get into the market sooner, without waiting to save a full deposit.

• Buyers avoid LMI, which can save them tens of thousands of dollars.

• Buyers may have access to more loan products with lower interest rates.

The cons of guarantor loans

• If the buyer can’t meet their repayments, their guarantor may be liable for the guaranteed portion of the debt.

• The guarantor’s property may be at risk if the buyer defaults on their mortgage.

• If the borrower doesn't make their repayments, it could impact the guarantor's credit score.

Things to think about – for buyers and guarantors

Before taking out a guarantor loan, buyers should consider whether they will be able to afford the repayments, both now and in the future. Also, they should think about how long they will need the guarantee. (Generally, it can be removed once the buyer has built up 20% equity in the property.)

Meanwhile, potential guarantors should understand the financial and legal obligations involved; as part of the process, they should speak to a mortgage broker, financial adviser and lawyer. Also, guarantors should have a direct conversation with their child about what would happen if things don’t go to plan.

Case study

Mia wants to buy a $700,000 unit but has only $35,000 in savings. Her dad uses the equity in his home to guarantee 20% of the loan (i.e. $140,000). This helps Mia buy the unit straight away, without needing to use all her own savings or pay LMI. Mia hopes to build up 20% equity in the property within five years, at which point she will refinance her loan so she can remove her father from the guarantee.

Why the use of guarantor loans is likely to keep rising

With property prices continuing to climb, more first-home buyers may turn to the Bank of Mum & Dad for help. That would also mean parents would have more equity to support their children.

Contact me if you’d like to explore your options – whether you’re a first-home buyer or a potential guarantor.