Compare low income and guarantor home loans

In Australia, guarantor home loans are mortgages where the applicant has a guarantor who will take responsibility for the home loan repayments should the applicant default. This may allow a borrower to buy property with a lower deposit and/or without having to pay Lender's Mortgage Insurance (LMI).

Guarantor home loans are sometimes considered an option for home buyers with bad credit, as they can help applicants who don’t meet standard eligibility criteria gain loan approval. When you're researching guarantor loans, remember that some lenders use different names for these loan products, such as ‘Family Pledge’, ‘Family Equity’, ‘Family Support’, ‘Family Guarantee’ and ‘Fast Track’. But whatever the name, they all refer to a security guarantee.

A guarantor is typically a parent or close family member of the applicant, using the value of the equity in their own home as additional security. The guarantor may agree to guarantee the full mortgage or may choose a limited guarantee that only covers part of the loan, such as just the deposit.

This may see a borrower with, say, a 5% deposit have a parent come on to the loan to guarantee another 15% of the property’s value against a security, such as the family home. By guaranteeing a home loan or a deposit against an existing asset, like the family home, this allows the home buyer to significantly boost their home loan application and increase their chances of approval.

 It’s important to note that taking out a guarantor home loan is a more time-consuming and complicated process than taking out an ordinary home loan. With an ordinary home loan, only the borrower needs to provide proof of identity, income, savings and assets, but with a guarantor home loan, the guarantor also has to take all of these steps.

The lender may conduct a valuation of the guarantor's property to confirm that they have sufficient equity to guarantee the loan. Also, the guarantor will have to provide a legal promise to pay off the mortgage if the primary borrower fails to do so. 

As the home owner begins to repay their mortgage, they typically will repay the portion that the guarantor has secured first. As per the above example, if the guarantor only helped with the deposit and the borrower repaid 15% of the home loan, then the guarantor may be released from financial obligation towards the mortgage.

There are a range of home loan lenders in the Australian market that offer guarantor options for home loans. Each lender will have their own set of eligibility criteria to meet, so it’s important that you read the terms and conditions and product disclosure statement before applying for a guarantor home loan.

Some popular guarantor home loans may include:

• Greater Bank Great Rate Fixed Home Loan
• St.George Bank Advantage Package Fixed Rate Home Loan
• ING Orange Advantage Fixed Rate Home Loan
• Westpac Premier Package Fixed Options Home Loan
• Suncorp Bank Home Package Plus

If you’re considering going guarantor on a home loan, you’ll want to familiarise yourself with the rights and responsibilities of this role. It is not a financial decision to be taken lightly, and it’s important that you weigh up the pros and cons of the decision before proceeding. 

While it is primarily the responsibility of the applicant to make sure the home loan repayments are made on time, it is in the interest of the guarantor to ensure this happens. If the applicant defaults on the loan, the guarantor may be asked to help with repayments, and any collateral offered up as security may be seized.

Becoming a guarantor is a major decision so it pays to seek independent financial advice before you jump in, and try to answer these questions:

1. How big is the guarantee that you are committing yourself to? Can you cover the ongoing mortgage payments if the borrower folds?
2. What kind of property is the applicant purchasing? (if it’s an investment property, you’ll want some reassurance that it’s a desirable investment).
3. When will you be liable to cough up money? Usually, banks and other lenders will proceed if the mortgage is in arrears for three to six months.
4. Can the applicant comfortably service repayments if interest rates were to rise?
5. How credible is the person that you are acting as guarantor for? One has to be brutally honest in answering this, especially if it involves your own son or daughter.

Most banks only allow parents to be guarantors for home loans. Some will consider guarantees from immediate family members like siblings, grandparents, spouses, de facto partners, or adult children.

Close friends and workmates are usually not accepted. If your guarantor is someone other than your parents, you may have to meet other lending conditions to qualify as a borrower. 

While some definitions of family pledge loans don’t denote any differences between these and guarantor loans, others suggest that a family pledge loan can be secured by extended family members - cousines, aunties, uncles, nieces and nephews - while guarantor loans are said to be exclusively secured by immediate family, usually parents.

Some family pledge loans may even allow friends to become guarantors for homebuyers, though this scenario may also be applicable to guarantor loans. It’s best to check with your bank or lender to see what options are available.

Don’t forget that whoever your guarantor is, they’re staking the equity in their own home against your loan and are assuming significant risk should you default on your repayments. Their liability shouldn’t be taken lightly.

You will need to provide standard identification and financial documentation when going guarantor on a home loan. If you’ve taken out a mortgage previously, the process should be familiar. The documentation you may require includes:

• Personal identification, such as a driver’s licence or passport
• Bank statements, tax returns and PAYG summaries.
• Proof of employment or income, such as a payslip.
• A valuation of your property, if being offered up as a security guarantee on the loan.

You don't always need to repay the entire loan to remove a guarantor from your mortgage. In fact, to remove your guarantor from your home loan, you’ll generally just need to put yourself in a stronger financial position. This may mean making mortgage repayments for several years and building up enough equity to reduce your loan-to-value ratio (LVR) to 80% or less. Further, your credit history, income and employment will need to meet the lending criteria on your own.

As some home loan guarantors only assist in securing an applicant’s deposit up to the value of 20%, once you’ve repaid this portion of your home loan, then you should be able to speak with your lender about having the guarantor removed from the mortgage. You may also be able to refinance to a new lender (and potentially nab a lower rate home loan or more flexible loan by refinancing) at this point.

It may be worth speaking with a mortgage broker for some financial advice and even legal advice around your rights as a home owner and the rights of a guarantor.

A guarantor may assist an applicant in boosting their borrowing power, as well as helping them gain home loan approval.

 In some instances, some home loan lenders may allow you to borrow 100% of a property’s value, essentially helping you to get a no deposit home loan. This will depend on the guarantor’s financial situation and any assets offered up as security.

 Some lenders may even allow you to borrow more than 100% of the property’s value, up to 110%. This may be helpful for paying for upfront costs, such as removalists, home renovations, or even stamp duty.

 Keep in mind that the smaller the deposit and the more you borrow, the more debt you are taking on board. Not only does a larger home loan debt usually mean greater home loan repayments, but you may be more likely to default on a home loan if you do not manage your budget accordingly.

If you take out a guarantor home loan, you might be able to:

• Enter the property market sooner if you're a first time buyer
• Qualify for discounted interest rates
• Avoid paying lender's mortgage insurance (LMI)
• Buy a new home or investment property with a more expensive purchase price

On the flip side, taking out a guarantor home loan may also mean:

• If the applicant defaults on the home loan, this will affect the guarantor’s credit history, as well as the applicant's.
• If the guarantor is unable to service the loan, any assets offered up as security may be seized by the lender to recoup lost costs.
• On a personal level, if the applicant defaults on the home loan this may adversely affect the relationship of the applicant and the guarantor.

If you’re struggling to save up for a deposit or need a home loan with bad credit, there are alternatives to guarantor home loans. 

1. Government assistance. You may want to consider some first home buyer government schemes designed to help new buyers get a foot on the property ladder, such as the First Home Loan Deposit Scheme.
2. Save up. It may be easier said than done, but if you can save up even just 5% of a home loan deposit, you may be able to qualify for low deposit home loans, such as a 95% LVR home loan.
3. Consider different areas to buy. If you’re unable to afford a house deposit or even a unit deposit in an area with high property prices, it may be worth looking in areas further outside of the CBD or even regional growth areas. Even a suburb nearby your “ideal” suburb may offer more affordable property values, while giving you close access to the benefits offered by your preferred location.  

Also, it’s important to explore ways to make yourself look like a more reliable (and therefore less risky) borrower. Here are five ways you might be able to achieve that goal:

• Increase your income: Get a second job, work more hours, ask for a pay rise.
• Reduce your spending: Cut back on non-essentials like socialising, booze, clothes, holidays, taxis.
• Increase your savings: Sell unwanted items on GumTree or Facebook Marketplace.
• Boost your employment profile: Stay in your job for longer, ask to move from casual or part-time to full-time.
• Cut back on credit cards: Lower your credit limit or even cut up your card. 

Before you apply for a guarantor home loan, it’s important that you compare your options to ensure you’re getting the best mortgage for your financial situation and budget. RateCity offers a number of tools to assist you in comparing home loans, including: 

Comparison tables

Comparison tables are a way to compare apples with apples, as they allow you to filter down and view home loan options in the market based on your specific requirements. You can specify the mortgage and deposit size, and even smaller details like whether you are a 457 Visa Holder. The results will be displayed side by side, so you can see how each loan stacks up to one another.

Calculators

Home loan calculators, such as the Borrowing Power Calculator and the Repayment Calculator, may also assist you in your journey for your best guarantor home loan. A Borrowing Power Calculator may help you analyse how much you can afford to borrow with a mortgage based on what you could afford to repay within your current budget; before you ever apply for pre-approval. Next, a Repayment Calculator may show you what the estimated repayments are for different home loan options, which may help you create a short list.

Real Time Ratings^TM

Real Time Ratings^TM is a world-first rating system that ranks home loans based on your individual mortgage requirements. This ranking system is displayed in the comparison tables and may help you narrow down your mortgage options. Real Time Ratings^TM gives each home loan a score out of five stars, based on loan costs and flexibility. It also factors in your loan size, deposit amount and borrowing type so you don’t waste time looking at loans that aren’t applicable to you.