Guide on How to Qualify for Guarantor Home Loans in Melbourne

Guarantor home loans can be a game-changer for people struggling to afford a home deposit in Melbourne. These loans allow a family member, often a parent, to use their property as additional security, helping borrowers enter the property market sooner. 

With Melbourne’s rising house prices, guarantor home loans have become an essential option for first-home buyers aiming to climb the property ladder. 

As experienced mortgage brokers, we simplify the loan process, ensuring you meet lender requirements and avoid unnecessary costs. 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 additional security for the loan by using the equity in their own property. This arrangement helps borrowers who may not have a large deposit or strong financial history to qualify for a home loan. 

Unlike traditional home loans, which often require a significant deposit and may involve Lenders Mortgage Insurance (LMI), guarantor home loans allow borrowers to avoid these barriers by leveraging the guarantor’s equity.

In comparison, traditional home loans rely solely on the borrower’s deposit, income, and credit rating. Guarantor home loans, however, offer an alternative path by increasing 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 the borrower can potentially borrow the full property price or more, depending on their 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
• Borrower’s Deposit: $20,000
• Guarantor’s Security Contribution: $100,000 (provided through their equity)

In this scenario, the guarantor’s contribution covers the shortfall, allowing the borrower to access the entire loan amount without additional savings or LMI costs. The guarantor remains responsible only for the secured portion until the borrower builds sufficient equity in the property.

Who Can Be a Guarantor?

A guarantor is typically a close family member who agrees to provide additional security for a borrower’s 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 essential to meet certain eligibility criteria:

• Property Ownership: Must own property in Australia with sufficient usable equity.
• Strong Financial Position: A good credit history, consistent income, and no outstanding debt issues.
• Legal Responsibility: Must understand the risks involved and may need to seek independent legal advice.
• Relationship to Borrower: Typically restricted to parents, siblings, or grandparents.

Guarantors play a crucial role in helping borrowers secure their dream homes, but their financial stability and willingness to commit are key.

Melbourne Property Market Condition in 2024: Is Guarantor Home Loans Ideal?

In 2024, Melbourne's property market has experienced a period of stagnation, with median house prices showing minimal growth. As of October, the median house price was approximately $1.027 million, reflecting a modest 1.23% increase over the past year.

This plateau in property values presents a unique opportunity for prospective homebuyers. Utilising a guarantor home loan can be particularly advantageous in this environment, as it allows buyers to enter the market with reduced deposit requirements and potentially avoid Lenders Mortgage Insurance (LMI). 

By leveraging a guarantor's equity, buyers can enhance their borrowing capacity and secure more favourable loan terms. This strategy not only facilitates earlier entry into the property market but also positions buyers to capitalise on potential future growth as the market rebounds.

Source: Herald Sun

Benefits of Guarantor Home Loans

Guarantor home loans offer unique advantages for both first-home buyers and those struggling with deposit requirements. Here are five key benefits:

1. Reduced Deposit Requirement: With a guarantor’s equity, borrowers may not need a large cash deposit, making it easier to purchase a home.
2. Avoid Lenders Mortgage Insurance (LMI): Using a guarantor can eliminate the need for LMI, saving borrowers thousands of dollars.
3. Increased Borrowing Power: Borrowers can access larger loan amounts, enabling them to purchase homes in higher price ranges.
4. Faster Entry into the Property Market: By bypassing the need for extended deposit-saving periods, buyers can act quickly in competitive markets like Melbourne.
5. Support for First-Home Buyers: Family members can help younger buyers achieve their dream of homeownership sooner.

Risks and Responsibilities for Guarantors

Becoming a guarantor comes with significant financial and legal responsibilities. Guarantors provide additional security for the borrower’s loan, which means they are liable for the guaranteed portion if the borrower defaults. This can impact their credit report and limit their ability to access new loans. Additionally, the guarantor’s property may be at risk if repayment obligations are unmet. 

It’s crucial for guarantors to seek independent legal advice to understand the potential financial impact and ensure they are fully informed before signing a guarantee agreement. Supporting a loved one’s dream of homeownership is admirable but requires careful consideration of these risks.

Key Requirements for a Borrower to Qualify for a Guarantor Home Loan

To qualify for a guarantor home loan, borrowers must meet specific criteria to ensure they are financially capable of managing the loan. Here are the key requirements:

• Stable Employment History: Lenders look for consistent income and job stability over at least six to 12 months.

• Good Credit History: A clean credit file with no defaults or outstanding debts is essential to show responsible financial behaviour.

• Borrowing Capacity: Your income and expenses must demonstrate that you can afford the loan repayments without relying entirely on the guarantor.

• Genuine Savings: Some lenders prefer borrowers with a savings history, even if a deposit isn’t required.

• Pre-Approval: Borrowers must pass the lender’s pre-approval process, which involves providing proof of income, credit reports, and other supporting documents.

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

Steps to Apply for a Guarantor Home Loan in Melbourne

Applying for a guarantor home loan in Melbourne involves a structured process to ensure all requirements are met. Here’s a step-by-step guide:

1. Assess Your Eligibility

Review your credit score, employment history, and borrowing capacity to ensure you meet Melbourne lenders’ criteria.

2. Find the Right Guarantor 

Choose a guarantor, often a parent, with sufficient equity in their Melbourne-based property and a clean credit history.

3. Gather Required Documentation 

Provide proof of income, bank statements, credit reports, and a completed loan application. Guarantors must also supply property valuations and financial documents.

4. Understand Melbourne Lending Policies 

Research Melbourne lenders, as some may have specific rules, such as higher equity requirements or restrictions on guarantor relationships.

5. Submit the Loan Application 

Work with a mortgage broker to submit your loan application to a lender that aligns with your financial position and goals.

6. Legal and Financial Advice 

Both you and your guarantor should seek independent advice to understand the loan terms and guarantee agreement.

Following these steps ensures a smooth application process and compliance with Melbourne’s lending policies.

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 rising 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 Melbourne-specific 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 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 or term deposit as security for the borrower’s loan. This helps eligible borrowers reduce the house deposit required and avoid Lenders Mortgage Insurance (LMI).

What are the guarantor loan requirements?

Guarantor loan requirements include stable income, a strong credit history, and meeting the lender’s credit requirements. For the guarantor, owning property with sufficient 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 the borrower defaults.

Can first-time buyers use a guarantor home loan?

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

What type of loan is suitable for a guarantor arrangement?

A guarantor loan is often structured as a standard home loan or low-deposit home loan. Your choice of loan type depends on your financial circumstances and personal credit ratings. Consulting a broker for expert advice can help identify the best loan type.

Can a guarantor be removed from the loan later?

Yes, a guarantor can be released from their guarantor arrangement once the borrower has repaid a sufficient portion 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 can often borrow up to 100% of the property value, as the guarantor’s equity provides additional security for the lender.

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

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. 

Start your homeownership journey with confidence by calling LM Connect at 0423 713 362, and schedule a free consultation with our expert brokers today!