What is a home loan guarantor | Benefits and risks - NAB

What is a home loan guarantor?

A home loan or mortgage guarantor is someone who helps you secure a home loan by agreeing to use their property as security for your mortgage. The guarantor doesn’t provide any cash payments, instead offers a portion of their home equity to help you meet your deposit requirements. Having a guarantor on your home loan requires an agreement between you, your guarantor and the bank and is a legal commitment.

This means your guarantor is responsible for the guaranteed portion of the loan if you’re unable to make your repayments. You can release your guarantor from the loan through an internal refinance process when you’re ready to take on the full risk of the loan, for example, after you’ve built up sufficient equity.

How guarantor support works

  • You decide to apply for a home loan with the deposit you’ve saved.

  • A guarantor agrees to help by using equity in their own home as security.

  • The lender looks at both you and your guarantor, to make sure everyone understands the commitment and can meet the requirements.

  • The guarantee usually covers the gap to a 20% deposit.

  • As you make repayments, you build equity in your home. This can also happen if your property increases in value over time.

  • Once your loan is low enough (often when it reaches 80% of the property value or less), you may be able to remove the guarantor through a formal review or refinance process.

Example of guarantor support

Let’s say you’re buying a $600,000 home with a $30,000 deposit (5%). This means you’d be borrowing 95% of the property’s value. A guarantor could use equity in their own property to secure the additional 15% ($90,000) needed to reach the equivalent of a 20% deposit. This can reduce the lender’s risk to an effective loan to value ratio (LVR) of 80%, which may help you avoid paying lender’s mortgage insurance (LMI). It’s worth noting that the guaranteed amount will depend on your lender’s policies.

Benefits for borrowers

  • You may qualify for a home loan with a lower deposit. Instead of needing a full 20% deposit, you may need as little as 5% with the guarantor securing the remaining 15%.

  • You may avoid LMI and save thousands of dollars.

  • With a guarantor’s support, your overall risk is reduced which can improve your chances of getting a home loan approved.

  • Support from a guarantor can help you enter the home ownership market sooner instead of waiting to put together a big deposit.

Risks for guarantors

  • If the borrower defaults on payments, the guarantor is legally responsible for the guaranteed portion of the loan.

  • In case the loan is unpaid, and the bank takes action, it can impact the guarantor’s credit score.

  • A guarantor may reduce their borrowing capacity and reduce their ability to apply for a new loan.

  • If the borrower is unable to repay, the lender may repossess your guarantor’s secured asset.

Tips for borrowers and guarantors

For borrowers

  • Borrow responsibly: Make sure you can comfortably meet your repayments before asking for a guarantor.
  • Have a clear plan: Work on building equity in your home quickly (at least 20%) to avoid paying LMI. You can do this by making extra repayments. Property value appreciation will also help build equity, but the timeline can vary. Overall, building equity will help you release your guarantor from the home loan sooner. 
  • Consider a smaller guarantee: Some lenders allow limited guarantee (eg: 15% of the home’s value instead of the full loan). 
  • Factor in upfront and ongoing costs: Be sure to be aware of buying costs like stamp duty and legal fees. It’s important to run your numbers to know if you can afford the loan, as a guarantee doesn’t reduce your home loan repayments.

For guarantors

  • Understand the legal and financial risks: Consult a financial advisor and/or a lawyer before signing any agreements. 
  • Set boundaries: Negotiate a time frame for when your obligation as a guarantor should end. This could be when the borrower’s equity is at 20% or after a set period of consistent payments. Having a clear exit strategy will protect your financial security and wellbeing. 
  • Assess your financial situation: Evaluate your ability to cover the guaranteed portion if needed. It’s important that you’re able to meet your own financial goals without undue strain.
  • Explore other ways to help: Instead of being a guarantor, you could consider gifting money for a deposit, or co-purchasing a home. Every option has its own risks and benefits, so it's important to choose an approach that aligns with your financial situation.

If you can’t use a guarantor for a home loan

If a guarantor isn’t an option for you, there are still other ways you may be able to get into the property market:

Australian Government 5% Deposit Scheme

If you’re a first home buyer, you may be able to buy your home with as little as 5% deposit without paying LMI (minimum 2% deposit if you’re a single parent). The government guarantees part of the loan, subject to eligibility criteria, price caps and lender participation.

Saving for a larger deposit

Building a bigger deposit can reduce how much you need to borrow and may help you avoid LMI. Savings accounts like NAB Reward Saver or NAB iSaver can help you grow your savings over time while keeping your money accessible.

Buying with a co-borrower

Purchasing a home with a partner, family member or trusted friend may increase your combined income and deposit. This can improve your borrowing power, but it’s important to understand that all borrowers are jointly responsible for the loan.

Rentvesting

Another option to help you get on the property ladder quickly is to buy your first property using a strategy known as rentvesting. As with all financial decisions, it’s crucial to weigh up both the benefits and potential risks when considering rentvesting, as various factors often outside your control can ultimately determine its effectiveness.

Every option has pros and cons, and what works best depends on your personal situation. Speaking with a home loan expert can help you understand which pathway may suit you best.

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The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, financial and taxation advice before acting on any information in this article.

Target Market Determinations for these products are available at nab.com.au/TMD.