Guide on how to qualify for guarantor home loans in Melbourne

Guarantor home loans can really change the game for people finding it hard to save a home deposit in Melbourne. These loans let a family member, often a parent, use their property as extra security. This could help you step into the property market sooner.

With cost-of-living pressures making it more challenging to save a 20% deposit, guarantor home loans have become a helpful choice for first-home buyers looking to get into the property market.

As experienced mortgage brokers, we can simplify the loan process. Let’s explore how guarantor home loans work, and what it takes to qualify in Melbourne.

What are guarantor home loans?

Guarantor home loans are a type of mortgage where a family member, typically a parent, provides extra security for the loan by using the equity in their own property. This arrangement can help people who might not have a large deposit or a strong financial history to qualify for a home loan.

Unlike traditional home loans, which often need a significant deposit or may involve lenders mortgage insurance (LMI), guarantor home loans can help you avoid these barriers by using the guarantor’s equity.

Traditional home loans rely only on your deposit, income and credit rating. Guarantor home loans take these into consideration, however, offer another way by potentially increasing your borrowing capacity and reducing upfront costs, making homeownership more accessible.

How do guarantor home loans work?

In a guarantor home loan, the guarantor’s equity acts as a safety net for the lender. This means you could potentially borrow the full property price or even more, depending on your borrowing capacity and the guarantor’s equity.

Let’s look at a simple calculation to understand how it works:

Sample calculation

• Property price: $600,000
• Required deposit (20%): $120,000
• Your deposit: $20,000
• Guarantor’s security contribution: $100,000 (provided through their equity)

In this example, the guarantor’s contribution helps cover the shortfall. This may let you access the entire loan amount without needing additional savings or LMI costs. 

Who can be a guarantor?

A guarantor is typically a close family member who agrees to provide extra security for your home loan. In Melbourne, this is most commonly a parent or legal guardian, but some lenders may accept other immediate family members under specific conditions.

Before becoming a guarantor, it’s important to meet certain eligibility criteria:

• Property ownership: They must own property in Australia with enough usable equity.
• Strong financial position: This means a good credit history, consistent income, and no outstanding debt issues.
• Legal responsibility: They must understand the risks involved and it is a good idea for them to seek independent legal advice.
• Relationship to borrower: This is usually limited to parents, siblings or grandparents.

Guarantors can play an important role in helping you secure your dream home, but their financial stability and willingness to commit are key.

Benefits of guarantor home loans

Guarantor home loans offer helpful advantages for both first-home buyers and those finding it difficult with deposit requirements. Here are four potential key benefits:

• Reduced deposit requirement: With a guarantor’s equity, you may not need a large cash deposit.
• Avoid lenders mortgage insurance (LMI): Using a guarantor can remove the need for LMI, potentially saving you thousands of dollars.
• Increased borrowing power: You could access larger loan amounts, allowing you to consider homes in higher price ranges.
• Faster entry into the property market: By reducing the need for long deposit saving periods, you can act more quickly in competitive markets like Melbourne.

Risks and responsibilities for guarantors

Becoming a guarantor comes with important financial and legal responsibilities. Guarantors provide extra security for your loan, which means they are responsible for the guaranteed portion if you cannot meet your repayments. This can impact their credit report and limit their ability to access new loans. Also, the guarantor’s property could be at risk if repayment obligations are not met.

It’s important for guarantors to seek independent legal advice to understand the potential financial impact and help ensure they are fully informed before signing a guarantee agreement. Supporting a loved one’s dream of homeownership is a kind act, but it takes careful thought about these risks.

Key requirements for you to qualify for a guarantor home loan

As a borrower, to qualify for a guarantor home loan, you must meet specific criteria to help ensure you are financially capable of managing the loan. Here are the key requirements:

• Stable employment history: Lenders look for consistent income and job stability, usually over at least six to 12 months.
• Good credit history: A clean credit file with minimal defaults or outstanding debts is helpful to show responsible financial behaviour.
• Borrowing capacity: Your income and expenses must show that you can afford the loan repayments without relying completely on the guarantor.
• Genuine savings: Lenders prefer you to have a savings history, even if a deposit isn’t needed.
• Lender’s criteria: You must pass the lender’s criteria, which involves providing proof of income, credit reports and other supporting documents.

Meeting these requirements shows your financial position and commitment to the lender, making the approval process smoother.

Steps to apply for a guarantor home loan in Melbourne

We can help you apply for a guarantor home loan. Here’s an example of what the process may look like:

1. Assess your eligibility: We review your credit score, employment history, and borrowing capacity to help ensure you meet lenders’ criteria.
2. Find the right guarantor: Choose a guarantor, often a parent, with enough equity in their property and a clean credit history.
3. Gather required documentation: Provide proof of income, bank statements and credit report. Guarantors must also supply property valuations and financial documents.
4. Understand lending policies: We work with a panel of lenders and we understand their criteria and requirements. This helps us recommend the right one for you.
5. Submit the loan application: We submit your loan application on your behalf.
6. Legal and financial advice: Both you and your guarantor should seek independent advice to understand the loan terms and guarantee agreement.

Case study: how a guarantor home loan helped Sarah buy her first home in Melbourne

• Background: Sarah, a 28 year old teacher in Melbourne, had been renting for years while saving for a home deposit. Despite her consistent income and good credit rating, the changing property prices in Melbourne made it challenging to save the required 20% deposit.
• Solution: Sarah’s parents offered to act as guarantors by using the equity in their family home. With their support, Sarah applied for a guarantor home loan through her mortgage broker, who guided her through lending policies and the required documentation.
• Outcome: Sarah purchased a $700,000 property with no upfront deposit and avoided paying lenders mortgage insurance (LMI), saving her over $20,000. With the guarantor arrangement in place, Sarah is now making regular loan repayments and building equity in her first home.

This hypothetical case highlights how guarantor home loans can make homeownership achievable for first-home buyers in Melbourne.

FAQs

How does a guarantor home loan work?

A guarantor home loan works by allowing a family guarantor to use their property as security for your loan. This can help eligible borrowers reduce the house deposit needed and avoid LMI.

What are the guarantor loan requirements?

Guarantor loan requirements include a stable income, a strong credit history, and meeting the lender’s credit requirements. For the guarantor, owning property with enough equity and understanding their loan obligations is essential.

Who can be a guarantor for a home loan?

Typically, a guarantor is a parent or close family member. A family guarantor must have a solid credit record, no outstanding loan payments, and the financial capacity to cover potential risks if you cannot make your repayments.

Can first-buyers use a guarantor home loan?

Yes, guarantor home loans are a popular choice for firs-home buyers. They can reduce the house deposit needed and make monthly mortgage repayments more manageable by avoiding LMI.

Can a guarantor be removed from the loan later?

Yes, a guarantor can be released from their guarantor arrangement once you have repaid enough of the loan or built enough equity in the property. This typically requires refinancing or renegotiating the loan obligations.

Can I borrow 100% of a home loan with a guarantor?

Yes, with a guarantor, you may be able to borrow up to 100% of the property value, as the guarantor’s equity provides extra security for the lender.

How much of a deposit do you need if you have a guarantor?

This depends on the lender. If you have a guarantor, you may not need any deposit at all, as their equity can cover the lender’s requirements. However, having some savings is still beneficial.

Conclusion

Guarantor home loans can open the door to homeownership, especially in Melbourne’s competitive property market. By understanding the requirements, benefits, and responsibilities, you can confidently decide if this option is right for you. With the right support and preparation, a guarantor arrangement can help you achieve your goal of owning a home sooner.