Buying a home
Getting a home loan with a guarantor
4 March 2021
Saving for a deposit to buy a house can be a challenge. Most lenders require a 20% deposit. If you don’t have that, you’ll often have to pay Lenders Mortgage Insurance (LMI). LMI is a cost you'll incur if you contribute less than a 20% deposit towards the home's purchase price. It protects your lender if you’re unable to meet your repayments and must sell your home for less than the loan's value.
Using a guarantor can allow you to purchase your new home and borrow the full amount you need, without having a 20% deposit or paying LMI. So how does it all work, and is it the right option for you?
How does a home loan guarantee work?
A guarantor uses the equity of their own home (i.e. how much their home is worth, minus anything they owe on their home loan) to provide extra security for your home loan. They’re not required to provide any money upfront themselves, to you or your lender. Instead, they offer to use their equity to add security to your loan. This added security can reduce the deposit you need to pay as a home loan deposit.
- You’ve found your dream house, and it’s valued at $400,000.
- You’ve saved up $20,000, which is 5% of the property’s value.
- You need a 20% deposit to avoid paying Lenders Mortgage Insurance (LMI), which means you’ll need to save an additional $60,000.
- Your parents own a $500,000 investment house, which they have paid off in full.
- They offer $60,000 of their home’s equity as security for your loan, which in addition to your $20,000 in savings equals the 20% deposit you need to avoid LMI.
- Once the equity in your own home reaches 20%, you can apply to have your guarantor released from their obligations.
There are risks, though, that are important for you and your potential guarantor to consider. These include:
- If your guarantor wants to request a loan or line of credit themselves, they’ll need to disclose they’re currently guaranteeing your home loan. This may affect their borrowing abilities.
- If you can’t meet your home loan repayments, your lender may have to sell your property to recover the amount you owe. If the sale price doesn’t cover what you owe, your lender can legally ask your guarantor to cover it – up to the amount they guaranteed through their equity. If your guarantor cannot pay this amount or agree on another solution with your lender, your lender may have to sell the guarantor’s property to recover the amount still owed – but only up to the amount they guaranteed through their equity.
It’s very important both you and your guarantor consider the potential risks involved and read relevant documentation before signing up for anything. Lenders will often require guarantors to seek independent legal and financial advice before they approve your loan.
Who can be a guarantor?
The requirements for who can be your guarantor vary among lenders. While it’s often decided on a case-by-case basis, your guarantor may need to:
- be a family member over the age of 18 – most lenders will consider an immediate family member, such as a parent, sibling or partner
- have enough equity to put towards your home loan, and
- not be at risk of financial hardship should they be required to honour the guarantee.
Using a guarantor through Suncorp Bank’s Deposit Kickstart
After carefully considering the pros and cons of using a guarantor for your home loan, you may decide it’s the right option for you. If that’s the case, Suncorp Bank’s Deposit Kickstart could be something worth exploring.
The Deposit Kickstart is available for approved borrowers using a family member as a guarantor, for a property they’re going to own and occupy themselves. If eligible, you may be able to borrow up to 110% of the purchase price of your new property (meaning you won’t need a deposit and you can borrow additional funds to cover some of the costs).
Our experienced home loan specialists are happy to talk through the Deposit Kickstart and help you understand whether it could be right for you. All advice is 100% obligation-free.
- Everything you need to know about the First Home Owners Grant in your state
- What you need to know about home loan pre-approval
- How to save for your first home in Australia
Home Loans are provided by Suncorp-Metway Ltd ABN 66 010 831 722 AFSL No. 229882 Australian Credit Licence 229882 (“Suncorp Bank”) to approved applicants only. Fees, charges, terms and conditions apply and are available on request. Insurance is issued by AAI Limited ABN 48 005 297 807 trading as Suncorp Insurance. Information provided is general advice only and has been prepared without taking into account any person's particular objectives, financial situation or needs. You should make your own enquiries, consider whether advice is appropriate for you and read the relevant Product Disclosure Statement or Product Information Document before making any decisions about whether to acquire a product.
The information is intended to be of a general nature only and any advice has been prepared without taking into account your particular objectives, financial situations or needs, so you should consider whether it is appropriate for you before acting on it. We do not accept any legal responsibility for any loss incurred as a result of reliance upon it – please make your own enquiries.