Using a Guarantor Loan to Purchase with No Deposit

Australian mortgage lenders generally require a 20% deposit, but there are ways you can get a home loan with less – and you may not even need to pay lender’s mortgage insurance (LMI).

One way to achieve this is to have another party, typically a close family member, stand as guarantor for your mortgage by agreeing to cover the repayments if you cannot.

In most cases, they will use the equity in their property as security against your loan. Alternatively, if they have substantial cash savings, some lenders will allow them to use these funds as surety.

Potential benefits of a guarantor loan

1. You could get a mortgage without a 20% deposit without paying LMI

To obtain mortgage approval and avoid paying LMI, you usually need a 20% deposit; on a $1 million loan, this amounts to $200,000.

If, however, you don’t have this deposit, your guarantor’s security can cover the full amount or your shortfall.

For example, if you only have $100,000, they can guarantee the remaining $100,000. This will take your deposit from 10% to 20%, helping you avoid LMI.

Similarly, if you have no deposit, their security can cover the full $200,000.

While your guarantor will not need to make any cash contribution to your mortgage, there needs to be enough equity in their property – or sufficient savings – to do this.

2. You could get on to the property ladder sooner

Saving a 20% deposit usually takes a few years; in that time, property prices could increase significantly. A $1 million home today will require a $200,000 deposit but, in five years’ time, that same home may be valued at $1.5 million, meaning your deposit will need to be $300,000.

Thus, by the time you have reached your initial savings goal, you may need a bigger deposit – or to buy a cheaper property.

By using a guarantor loan to cover your deposit, you could buy a property sooner and potentially save a lot of money.

3. You could secure a home loan with a less-than-ideal credit history

If you do not have a good credit score, your mortgage application might be declined. But, if you have a guarantor, lenders may be willing to give you a loan; should you not be able to afford your repayments, they know your guarantor will.

You will, however, still need to prove that you can afford the loan repayments.

4. You could qualify for a bigger home loan

Even if you can qualify for a mortgage on your own, a guarantor loan makes it possible to secure a bigger loan.

For example, if a lender is willing to grant you an $800,000 mortgage, but the property you wish to buy requires a $900,000 loan, your guarantor could stand as surety for the extra $100,000.

Furthermore, as guarantor loans offer additional security, you could get a more competitive interest rate.

Guarantor loan risks

Just as there are advantages to obtaining a guarantor loan, there are also risks:

• Your guarantor will need to repay your mortgage should you be unable to; If they cannot, they may need to sell their home

• Your guarantor may not be able to sell or refinance their property as some of their equity is tied up in yours

• Family relationships could be strained if financial issues arise

Applying for a guarantor home loan

Guarantors need to:

• Be over the age of 18 (and typically under 65)

• Be an Australian citizen or permanent resident

• Own a home with sufficient usable equity or have sufficient cash savings

• Meet the lender’s qualifying criteria

Both you and your guarantor will need to follow the standard home loan application process, submit the required documentation and undergo serviceability assessments.

Your guarantor will also need to provide their mortgage documents and a signed guarantor agreement, and their property will need to undergo a professional valuation. 

Neses Finance can help you apply for, and secure, a guarantor loan – as well as pre-approval. Contact us today for more information and advice.