Buying your first home can sometimes feel like a distant dream, especially with rising property prices, high interest rates, and the increasing cost of living. However, there are smart strategies that can bring that dream closer to reality — one of them is using them as a loan guarantor for your mortgage.
A guarantor can help you access the property market sooner and potentially reduce some of the costs associated with buying your first home. But how exactly does a guarantor mortgage work, and is it the right move for you? Let’s dive in.
What is a Guarantor Mortgage?
A guarantor mortgage allows you to use another person’s property as additional security for your home loan. Typically, a parent or close family member acts as the guarantor.
It’s important to note that a guarantor doesn’t co-own the property or make repayments on your behalf. Instead, they provide security for a portion of the loan, helping you to avoid Lender’s Mortgage Insurance (LMI) and potentially qualify for better loan terms, such as a lower interest rate.
This setup can significantly fast-track your ability to buy a home, especially if you have a small deposit but a strong repayment ability.
How Can a Loan Guarantor Help You?
There are several advantages to having a guarantor support your home loan:
- Avoiding LMI Costs:
If your deposit is less than 20% of the property’s value, lenders usually require you to pay LMI. LMI can cost thousands of dollars, but with a guarantor providing additional security, you may avoid this extra expense entirely. - Securing Better Interest Rates:
With more security in place, lenders may offer you a lower interest rate, reducing your monthly repayments and saving you money over the life of the loan. - Increasing Your Borrowing Power:
A guarantor can help you borrow a higher amount, giving you more options when choosing your first home, especially in a competitive property market. - Entering the Market Sooner:
Rather than spending years saving for a 20% deposit, you could buy a home much sooner with the help of a guarantor.
How Does a Guarantor Mortgage Work?
Guarantor mortgages can be structured in a few different ways, depending on the lender’s policies and your specific needs:
- Partial Guarantee:
Most commonly, the guarantor covers around 20% of the purchase price. This arrangement means they are only liable for that portion of the loan if you default, not the entire loan amount. - Full Guarantee:
In rarer cases, the guarantor might guarantee the entire loan above what you can contribute as a deposit. While this provides maximum borrowing support, it also increases the guarantor’s exposure to risk.
Once your home loan balance drops below 80% of the property’s value — either through regular repayments, property value increases, or lump-sum payments — the guarantor’s responsibility can often be removed.
Is a Guarantor Mortgage Right for You?
While the benefits are clear, using a guarantor should be carefully considered by both parties. Here’s what you need to keep in mind:
- Risks to Your Guarantor:
If you fail to meet your mortgage repayments, your guarantor could become responsible for the debt. In extreme cases, their property could be at risk. It’s essential that both you and your guarantor understand the implications before proceeding. - Assess Your Financial Stability:
Before involving a guarantor, make sure your own financial situation is secure. Stable employment, a reliable income, and a realistic budget for repayments are critical to minimizing risk. - Plan an Exit Strategy:
Have a clear plan to release the guarantor as soon as possible. Making extra repayments or refinancing when your financial situation improves can help achieve this.
Important Steps Before Using a Loan Guarantor
- Have an Open Discussion:
Talk openly with your potential guarantor about the process, risks, and responsibilities. Transparency is key to maintaining trust and protecting the relationship. - Seek Professional Advice:
Before proceeding, it’s essential to get expert guidance. A mortgage broker can help structure the guarantor arrangement to best suit your needs. - Independent Legal and Financial Advice:
It’s strongly recommended that your guarantor seeks their own legal and financial advice before signing any documents. This ensures they fully understand their obligations and can make an informed decision. - Future Planning:
Work on strategies to remove the guarantor’s obligation as soon as possible. Setting repayment goals or planning for property value increases can help speed up the process.
Alternatives to a Guarantor Mortgage
If using a guarantor isn’t suitable, there are alternative pathways to buying your first home:
- Saving for a Larger Deposit:
While it may take more time, saving a 20% deposit eliminates the need for a guarantor or LMI, giving you more independence and lower risk. - Co-Borrowing:
Instead of a guarantor, a family member could become a co-borrower, jointly owning and being responsible for the property and loan. However, this arrangement requires careful legal and financial planning. - Financial Gifts:
A family member may choose to gift you money for your deposit. This can help you avoid using a guarantor but must be structured correctly to satisfy lending criteria.
Ready to Take the Next Step?
Buying your first home is a major milestone, and with the right support, it’s more achievable than you might think.
At Gold Finance, we specialize in helping first-home buyers navigate their options — including guarantor loans — with tailored advice to suit your individual needs. Our experienced team will guide you through every step, from exploring guarantor options to helping you structure your loan for success.
If you’re considering a guarantor mortgage or simply want to understand your best path to homeownership, reach out to Gold Finance today. Let us help you make your dream home a reality while protecting the interests of both you and your family.