Does having a guarantor increase borrowing power? Yes, it does. Most banks will lend up to 105% of the purchase price with guarantor support. This gives first-time homebuyers a major advantage in today's competitive market.

A guarantor loan lets a family member (usually a parent) use their home equity as extra security for your loan. Lenders view your application differently with this setup. You might only need a 5% deposit instead of the usual 20%, as your guarantor secures the remaining 15%. Your risk profile looks better to lenders, which improves your chances of loan approval. The guarantor's backing helps you avoid Lenders' Mortgage Insurance (LMI) completely. This means you can step into the property market much sooner.

This piece looks at how guarantors work and their effect on your borrowing capacity. You'll learn what you need to know before you commit to this type of financial arrangement.

What is a Guarantor and How Do They Work?

A guarantor acts as a financial backup in the home loan process. They provide a safety net for borrowers who might find it hard to get their mortgage approved. Let me explain how guarantor arrangements work so you can decide if this option works for you.

Definition of a guarantor

A guarantor takes legal responsibility for a borrower's home loan if they can't make their repayments. They make a promise to cover the loan payments when the borrower fails to pay. Most lenders want guarantors to be close family members like parents, grandparents, or siblings. Some financial institutions might accept extended family or ex-spouses in special cases.

Your guarantor needs to own a home with enough equity. They should also show they can handle the guaranteed part of the loan financially. The arrangement doesn't involve any money changing hands between the guarantor, borrower, or lender.

How does a guarantor work in home loans

The guarantor's property equity becomes extra security for your loan. This lets you buy property sooner and might help you avoid Lenders Mortgage Insurance (LMI).

Here's a simple example: You want to buy a home but have a small deposit. Your parents can use some of their home's equity as security. They don't give you cash - their home equity just becomes collateral for your loan.

You can ask to release your guarantor once you've built enough equity through your repayments or when your property value goes up. This usually happens through an internal refinance that frees your guarantor from their obligations.

Types of guarantor arrangements

The Australian mortgage market offers several guarantor options:

• Security Guarantee - This common type uses the guarantor's property equity as extra security. It helps borrowers who don't have big deposits or want to avoid LMI.
• Limited Guarantee - Your guarantor secures about 20% of the loan, which reduces their risk. The guarantor can be released after this portion gets paid off.
• Family Guarantee - This option is made for parents who want to help their children buy property. They can use their property equity or cash deposits as security.

Most guarantor loans split into two parts: a bigger loan (usually 80% of the property value) secured by your purchased property, and a smaller one secured by both properties.

These options give you flexibility to choose what works best for your situation while protecting everyone involved.

Can a Guarantor Increase Your Borrowing Power?

People looking to buy homes often ask how much a guarantor can help them borrow. The connection between guarantors and borrowing power isn't as simple as many think.

How lenders assess borrowing power with a guarantor

Lenders look at your borrowing power based on your financial situation, even with a guarantor. Your income, expenses, credit score, and current debts are the foundations of how much you can borrow. A guarantor doesn't boost your ability to make payments directly. They just give extra security that makes lenders see your application as less risky.

In spite of that, lenders take a close look at your guarantor's finances too. They check if the guarantor has enough equity in their property and can cover the payments if you default. Having guarantor duties can affect their chances of getting future loans since they must tell lenders about these responsibilities.

Typical borrowing limits with guarantor support

Guarantor support opens up better borrowing options based on what the loan is for. First-home buyers usually get the best deals, followed by construction loans and investment properties. Debt consolidation plans might let you borrow more compared to your property's value.

Different lenders set different maximum amounts. The security from a guarantor helps you overcome deposit gaps that would usually stop you from buying property.

Examples of increased borrowing capacity

To cite an instance, see what happens when your deposit falls way below what's usually needed. Through a family security guarantee, parents can offer equity from their property as extra security. This setup lets you borrow more of the property's value than you could with just your savings.

Effect on loan-to-value ratio (LVR)

The loan-to-value ratio shows the biggest benefit of having a guarantor. Extra security from guarantors brings down your LVR, which might put it under important limits. A guarantor can turn a risky loan application into something lenders like better. This helps you get improved terms and avoid getting pricey insurance.

What Lenders Look for in a Guarantor

The process of getting a guarantor goes beyond just finding someone to back your loan application. Banks and lenders have strict rules about who can be your guarantor and what they need to do.

Eligibility criteria for guarantors

Banks look closely at family relationships to assess potential guarantors. They usually limit guarantor arrangements to close family members—parents, adult children, siblings, grandparents, or spouses/de facto partners. Some banks might accept legal guardians, too.

A guarantor needs to meet several requirements:

• They must own their home with enough equity
• Their finances should be stable enough to cover the guaranteed amount
• A good credit history and money management skills are essential
• They need to fit the bank's specific rules

Some banks might want the guarantor's existing home loan to be with them, especially if they're using the property as security.

Financial and legal responsibilities

The role of a guarantor comes with serious legal obligations. The guarantor becomes legally bound to pay the guaranteed portion if the borrower can't make payments.

This commitment affects guarantors in several ways. Their borrowing power drops while the guarantee stays active. If the borrower defaults, it hurts the guarantor's credit score. The worst outcome could see the bank take possession of the guarantor's secured asset—often their family home.

These risks are real, and banks want guarantors to get independent legal and financial advice before they sign anything.

Common restrictions and lender policies

Banks have extra rules to manage risks with guarantor arrangements:

• Most won't accept guarantees for non-residential properties, off-the-plan purchases, or mobile homes
• Some don't allow guarantor setups between non-spouses
• You might get limited guarantees that cap the guarantor's responsibility
• The borrower needs substantial equity in their property to release the guarantor
• Banks need proof that the guarantor got independent advice
• Banks prefer to take an investment property as security rather than a guarantor’s owner-occupied home which puts the guarantor at less risk.

Knowing these requirements helps make the application process smoother when you need a guarantor to boost your borrowing power.

Risks and Exit Strategies for Guarantor Loans

Guarantor arrangements can be beneficial, but they bring major risks and responsibilities that affect everyone involved. A clear exit strategy and good understanding of these risks help protect everyone's money.

Risks for the guarantor

The guarantor takes on huge financial risks if the borrower stops paying. They become legally bound to repay the loan, which can lead to serious money problems. Their chances of getting new loans go down because lenders look at this commitment during loan assessments. The biggest risk is losing assets - if no one can repay the loan, the bank might sell the guarantor's property to recover the money. On top of that, it shows up as a default on the guarantor's credit report and makes future borrowing tough.

Risks for the borrower

Borrowers face their own set of problems with guarantor loans. Family relationships often suffer when payment problems start. Money issues between family members create tension that can damage relationships. Borrowers who know these personal risks can handle them better. They need to remember that their money choices directly affect their guarantor's financial future and borrowing options.

How to release a guarantor from the loan

You need a good plan to release a guarantor. This usually happens after the borrower builds enough equity in their property—about 20% to avoid lender's mortgage insurance. Borrowers can speed up this process by:

• Paying extra to reduce the loan faster
• Getting regular property valuations to track value increases
• Looking at refinancing options once the loan-to-value ratio looks good

The release usually needs an internal refinance or partial release application with the lender.

Tips for managing the guarantee period

Good management of the guarantee period helps everyone involved. Clear talk about money expectations and responsibilities stops confusion. A written exit plan with deadlines keeps everyone accountable. Both sides should get their own legal and financial advice before signing anything. Guarantors might want to limit their guarantee to just part of the loan instead of the full amount to reduce their risk.

Conclusion

Guarantor arrangements have transformed the home buying journey for many Australians struggling to meet deposit requirements. With family support, buyers can enter the market sooner, avoid costly LMI, and access more favourable loan terms.

However, it’s crucial for both borrowers and guarantors to fully understand the legal and financial responsibilities involved. A guarantor’s assets are at risk if repayments fall behind, and borrowers must recognise the potential impact on their family’s financial well-being.

Careful planning is key to making guarantor loans work. Independent legal and financial advice is essential, and having clear exit strategies from the outset can protect relationships and reduce stress over time.

While guarantor loans can be complex, they offer a valuable opportunity to step onto the property ladder. With the right guidance, they can become a smart, temporary solution that builds financial independence without compromising family ties.

Need help navigating guarantor loans? Contact Synergy Mortgage Brokers for expert advice and personalised loan solutions tailored to your circumstances.

FAQs

Q1. How does a guarantor affect my borrowing power? A guarantor can significantly increase your borrowing power by providing additional security for your loan. This arrangement allows you to borrow up to 105% of the property's purchase price in some cases, reducing or eliminating the need for a large deposit.

Q2. Who can be a guarantor for a home loan? Most lenders require guarantors to be immediate family members, such as parents, grandparents, or siblings. Guarantors must own their own home with sufficient equity, demonstrate financial stability, and have a good credit history.

Q3. What are the risks for a guarantor? Guarantors face significant financial risks, including being responsible for repaying the guaranteed portion of the loan if the borrower defaults. They may also experience reduced borrowing capacity and potential asset loss if the debt cannot be repaid.

Q4. How can I release a guarantor from my loan? You can release a guarantor once you've built sufficient equity in your property, typically around 20%. This can be achieved through making extra repayments, property value appreciation, or refinancing when your loan-to-value ratio reaches an acceptable level.

Q5. Are there different types of guarantor arrangements? Yes, there are several types of guarantor arrangements, including security guarantees, limited guarantees, family guarantees, and servicing guarantees. Each type offers different levels of support and risk for both the borrower and the guarantor.