If you don’t have enough deposit for a home loan but can make the required home loan repayments, a guarantor could help you secure extra money to get a loan faster.

You could also save thousands of dollars by avoiding Lenders Mortgage Insurance (LMI). LMI is a type of insurance that lenders take out to cover the additional risk of high Loan to Value Ratio (LVR) lending. Generally, LMI is required for home loans where you have less than 20% deposit, i.e. the loan is greater than 80% of the property’s value.

You may also be eligible for a lower interest rate than you would be through a low deposit loan, making your repayments more affordable and possibly increasing your borrowing power.
After you’ve built up equity in your property (either through appreciation in prices or through paying off the loan principal), your guarantor can be released from the loan

The role of a guarantor is generally limited to the immediate family members, usually parents or siblings. Some lenders will allow extended family members and even ex-spouses to be a guarantor to a loan, but this varies depending on the lender.

No, you can borrow up to 100% of the property’s purchase price (depending on the lender’s requirements). The higher your deposit, the less equity your guarantor would need to offer to provide security on your loan. You’ll also have lower repayments and pay less interest over the life of the loan with a larger deposit.

Let’s say the house and land package you are looking at is costs $500,000 and you’ve saved a deposit of $25,000 (nice job btw). That’s equal to 5% of the property’s value.

Unless you have a deposit of at least 20% – $100,000 in this example – the lender will ask you to pay Lenders Mortgage Insurance (LMI). Instead of waiting to save the additional cash for the deposit, a guarantor home loan can offer a solution.

We’ll say a guarantor offers $75,000 of their own home equity as extra security for your loan. This will give you the 20% security you need to buy today without paying LMI.

In this way, it’s possible to get a home loan even when you have a small deposit.

A security guarantor will stay on your mortgage until you refinance your loan, special arrangements with your lender are in place, or you pay the loan off.

In some cases, a guarantor can request a release from the loan when you have built enough equity in your loan and have shown a history of servicing your mortgage repayments. The time frame for this varies on your situation. It can take several years, depending on the original loan amount, original deposit amount, loan type, repayments made and whether the property’s value has increased.

The amount you could save depends on the loan amount and how much deposit you would put in if you chose to go alone. For low-deposit home loans, you could save up to $15,000.

The guarantee is limited, usually to 20%, but the guarantor still uses their house as security for your loan. If you cannot make your loan repayments, the lender has the option to exercise their right to sell both properties if required to pay back the debt.