Guarantor Loan
A home loan where a family member provides their own property as additional security to support the borrower.
In detail
Guarantor loans allow a borrower to use equity in a family member property as additional security on their home loan. The most common use is helping first home buyers avoid LMI when they have insufficient deposit. The guarantor usually secures only a limited amount rather than the entire loan, and most lenders allow the guarantee to be released once the borrower LVR drops below 80 per cent.
Guarantor loans are generally limited to immediate family, most commonly parents guaranteeing a child purchase. The guarantor must demonstrate they are not reliant on pension income alone and that they understand the obligations. Independent legal advice is mandatory for guarantors in most states.
Why it matters for brokers
Guarantor structures can open home ownership for first home buyers with limited deposits. Brokers who can explain the risks clearly and structure the loan so the guarantee can be released quickly provide real value to multi generational families.
Example in practice
A first home buyer has a 5 per cent deposit on a $600,000 property. Her parents provide a guarantee secured against $60,000 of equity in their own home. The structure avoids LMI completely and the guarantee can be released once the borrower pays the loan down to 80 per cent LVR.
Related terms
Lenders Mortgage Insurance (LMI)
An insurance premium charged to borrowers that protects the lender, not the borrower, if a high LVR loan goes into default.
Loan to Value Ratio (LVR)
The loan amount expressed as a percentage of the property value, used by lenders to assess risk on a home loan.
First Home Owner Grant (FHOG)
A state or territory based cash grant paid to eligible first home buyers purchasing or building a new residential property.
Stamp Duty
A state based tax payable on the transfer of property, calculated as a percentage of the purchase price.
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