According to Domain Research as of 2024 it took an Australian couple aged 25-34 with an average income nearly five years to have a 20% deposit saved on an entry level house. In more expensive areas like Sydney and Melbourne, that delay may be significantly longer.
Some first home buyers just can't wait that long. If you're one of them, one way you could fast-track your way into your own home is with the help of a guarantor.
What is a guarantor home loan?
A guarantor home loan allows a close relative (typically a parent) to use the equity in their home as security for part or all of your mortgage. You still need to borrow money from a lender and repay it, but your guarantor provides additional security for the loan that reduces the lender's risk.
If you can't make your loan repayments, your guarantor is liable to cover them. If you guarantor also can't meet the repayments, they could be faced with the bank repossessing their home.
Your guarantor may choose to only guarantee a portion of the loan (say 20%) rather the whole thing. Once you've repaid that portion of the loan, the guarantor's property is safe even if you miss future repayments. The guarantor can then ask to be released from the loan.
Who can be a guarantor?
Most lenders will generally require a guarantor to be a close family member, such as a parent or partner, though some lenders may allow other relatives to be guarantors, like a sibling or grandparent.
Many banks will have different eligibility requirements of who can be guarantor, but the following usually apply:
- A stable income
- Between the ages of 18 and 65
- A good credit report
- Sufficient equity in their home (typically at least 80%), or they must own their home outright
- The guarantor's property must be here in Australia
How much can I borrow with a guarantor?
In many cases, lenders may allow you to borrow up to 100% of the value of the property, or even up to 110% if you're using a guarantor. Much of this will, of course, depend on the lender, your financial standing as a borrower, and the guarantor's financial situation.
Some lenders may require you to put down a deposit of some kind, typically at least 5% in genuine savings, even with a guarantor.
Guarantor home loans
Many lenders don't offer guarantor loans. Of those that do, some will require the guarantor switches their existing mortgage over. ANZ and Commonwealth Bank are examples of lenders that allow guarantor loans and don't require the guarantor to also be with them.
Benefits and risks of using a guarantor
For some borrowers, having a guarantor can be a great way to fast-track their way into the property market. For others, it can be too much of an extra burden knowing that the finances of a close family member could be at stake.
Benefits
- Get into the property market faster. Using a guarantor allows borrowers to leapfrog their way into the property market. Once you've got your foot in the door you can start building up equity and reap the rewards of capital gains if your property grows in value. Sometimes property prices can rise faster than your ability to save for a 20% deposit. What was a 20% deposit a few years ago may now only be worth 15% because house prices have risen so much in that time.
- Avoid paying Lenders Mortgage Insurance (LMI). LMI can add thousands of extra dollars onto your home loan. Using a guarantor can allow you to skip paying LMI altogether because the risk to the lender has already been insured by having the guarantor's home as security for the loan.
- Improve your chances of getting a home loan. Having a guarantor can also strengthen your home loan application as it demonstrates you have security in place for the loan. However, most lenders will still require you to demonstrate you'll be able to repay the home loan in your own right.
Risks
- Guarantor's property is at risk. This is the biggest risk of guarantor home loans. If the borrower can't make their loan repayments for whatever reason (i.e. they lose their job and suddenly have no income) the guarantor is then liable to cover the mortgage repayment. If they also can't make the repayments, the guarantor could end up being forced to sell their home to repay your loan. Obviously, this presents a huge risk and both parties need to be fully informed about it before entering into a guarantor agreement. This is especially the case if your parents are on the path to retirement - it could jeopardise their plans if the worst came to the worst.
- Guarantor's credit report could be ruined. Wrecking your guarantor's credit report is another nasty problem that could rear its ugly head if you as the borrower can't pay and nor can your guarantor. You'll have essentially ruined their credit record for a debt that wasn't even theirs. Ouch.
- The strain on relationships. Asking a loved one to go guarantor for you is an enormous financial commitment which can strain even the best relationship. Expect pretty tense family dinners if your parents don't think you're being responsible enough with your mortgage commitments.
What are my other options if I can't use a guarantor?
Obviously, having a parent who's willing to guarantee your house deposit is a privilege only a lucky few have. Many people need other means to get a slice of the Great Australian Dream.
Government support
There are several government initiatives that could be useful for budding homebuyers with a small deposit. The First Home Guarantee for example effectively means the Government acts as guarantor for up to 15% of the loan - meaning only a 5% deposit is necessary to avoid LMI. There are 35,000 places on the First Home Guarantee for the 25/26 financial year. The Regional Home Guarantee and Family Home Guarantee work similarly but also have limited availability.
Low deposit home loan
Buyers struggling to save up a decent 20% deposit may want to consider a low deposit home loan. As the name suggests, a low deposit home loan allows borrowers to take out a home loan with a deposit as low as 5%.
Since you're borrowing more than 80% of the property's value, many lenders will charge you LMI. Depending on how much you're borrowing, LMI can be a significant cost, ranging from a few thousand dollars up to twenty thousand dollars or more, depending on the price of the property you're buying.
Low deposit home loans are offered by many lenders including most of the major banks. They usually have higher interest rates, higher fees and stricter lending criteria to compensate for the extra risk.
90% home loan lenders
Buying a home without a 20% deposit? The table below features home loans with some of the lowest interest rates on the market for owner occupiers with 90% LVR.
Lender Home Loan Interest Rate Comparison Rate* Monthly Repayment Repayment type Rate Type Offset Redraw Ongoing Fees Upfront Fees Max LVR Lump Sum Repayment Extra Repayments Split Loan Option Tags Features Link Compare Promoted Product Disclosure
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Cash gift
If you've got willing wealthy parents, many lenders will accept cash you've been gifted as a deposit.
There are some rules though. A gift letter or statutory declaration has to be signed by the family member, stating the money is to be used to buy a property and that the loan is unconditional (meaning it's non-refundable). Non-refundable cash gifts can only be given from an immediate family member, which includes parents, siblings, grandparents but also de facto partners.
You can't rest on your laurels either as you need to be able to prove you have genuine savings and have the capacity to afford to make the loan repayments.
What if I want to be a guarantor?
Guaranteeing someone else's loan is a massive commitment not to be entered into lightly. Before you potentially sign your home away, these are the things to keep in mind:
- Think carefully about whether you can afford to be a guarantor and if the borrower can afford the loan
- Seek out legal and financial advice to make sure you understand how the loan process works and the impacts it could have on your financial situation
- Take your relationship with the borrower into account
- If possible, limit your guarantee in terms of the amount and time period
- Make sure you can cover the monthly repayments if you're required to in the event the borrower can't
- Are you prepared to repay the loan if the borrower can't?
- Consider if the borrower expects any life changes that will change their current circumstances (i.e. are they planning on having kids and leaving work?)
- Does the borrower have plans in place if their circumstances change?
- Do you have a strategy in place if the worst-case scenario happens and you need to sell your house to repay the guaranteed amount?
Savings.com.au's two cents
For many people guarantor home loans help get their application over the line, but just because you can buy a property without a 20% deposit doesn't always mean you should. In other circumstances, it might be better to patiently save up so make sure you keep in mind:
- What will happen if you can't make your home loan repayments?
- How could that affect your relationship with the guarantor?