How long does a guarantor stay on a mortgage in Australia?

With the cost of owning a home so far out of reach for so many Australians, many Aussies will opt for a guarantor home loan.
Ava Crawford
Written by
Ava Crawford
Imogen Baxter
Reviewed by
Imogen Baxter
Last updated
May 17, 2024
0 minute read
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family sitting on the couch in a home purchased with parents as home loan guarators

With the cost of owning a home so far out of reach for so many Australians, many Aussies will opt for a guarantor home loan: an immediate family member or close friend uses equity on their home to act as security on a new home loan.

While this can make things a lot easier for first-home buyers navigating the property market, it can also lead to many questions for borrowers. Namely, how long does my guarantor stay on my home loan?

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How long does a guarantor stay on a home loan in Australia?

There is no fixed amount of time for a guarantor to stay on a home loan in Australia, but most guarantors tend to stay on the home loans in question for two to five years.

This depends on many factors, like how quickly the loan is paid off (which will depend on your loan amount and if you are taking any extra home loan repayments) and any change in the property value.

Your guarantor will not be automatically removed from your home loan - this process must be done through internal refinancing.

This means you can actually choose when to take your guarantor off your home loan, which will typically be done when you have enough equity that you no longer need the security a guarantor provides or when your loan-to-value ratio (LVR) is high enough that your lender will accept you as a borrower without a guarantor.

LVR video

When is the best time to take your guarantor off your home loan?

There is no ideal time to remove a guarantor from your home loan, but there are things you should check for as you make that decision. You’ll want to wait for these key things to be in place:

  • When you have over 80% LVR: You will not want to remove a guarantor from your loan before you have a loan-to-value ratio of 90% (meaning you have paid 10% of the purchase price of the home). With 20% being the recommended home loan deposit in Australia, releasing a guarantor before you have an LVR of 80% will result in you needing to pay lenders mortgage insurance (LMI). This can be quite a significant cost on top of the value of your property.
  • Calculate your LVR with the OwnHome loan-to-value ratio calculator.
  • When you’re eligible for better interest rates: When you have paid a greater portion of the loan, your changed LVR tier may also entitle you to lower interest rates on your home loan. If your interest rate is calculated off of risk-based pricing, you could also do work in this time to look into your credit history and improve your credit score. By working to pay off any debts owing and improving your financial situation, you could improve your eligibility for lower interest rates and the resulting lower mortgage repayments.
  • When your guarantor wants to use their home equity for other things: Though it might be appealing to keep your guarantor on your home loan for as long as possible as a safety net, it’s important to remember that your guarantor’s property has value to them as well. While they are acting as guarantors, they may be unable to sell their own property should they want to move, purchase an investment property, or use home equity to finance ventures like retirement. This can place a lot of stress on a relationship and is one of the many reasons guarantors do not tend to stay on a loan for more than five years.

How do I remove a guarantor from my home loan?

Removing a guarantor from your home loan may operate differently depending on your specific mortgage, but the essential steps will remain the same.

  • First, you’ll need to speak to your mortgage broker (if relevant) to get the ball rolling and seek the relevant financial advice.
  • Check you meet any eligibility or loan requirements for internal refinancing.
  • Your lender or bank will most likely arrange a property valuation.
  • You will need to confirm the total loan amount.
  • Depending on your LVR, you’ll submit either an internal refinance (if your LVR remains over 80%) or potentially a partial release (for loan-to-value ratios below 80%). The waiting period for processing can be upwards of a week.
  • You’ll complete the internal refinance or property release, after which your guarantor can reclaim their home equity.

Costs involved in removing your guarantor

There will be some costs attached to removing a guarantor from a home loan, most notably any fees attached to property valuation, legal fees, mortgage broker fees, and any administrative fees involved in the process. There may also be some government fees attached to any transference of deeds.

If you are releasing the guarantor before you have sufficient equity in your own home, you may have to contend with lenders mortgage insurance (LMI) as well. This is why people tend to wait until they have paid 20% of the entire loan, as LMI is only required for homeowners with under 80% loan-to-value ratios. LMI can cost up to tens of thousands of dollars, similar to stamp duty in its magnitude, so avoiding this is always ideal.

FAQs

Why would I choose a guarantor home loan, and how does a guarantor home loan work?

Many people choose guarantor home loans if they only have a low deposit amount available or are struggling to save up their initial home deposit.

This is because a guarantor home loan gives additional security to lenders, using home equity from someone with their own home as a sort of safety net.

Though low deposit borrowers are generally relatively high risk, a guarantor on a property means that in case of a borrower defaults, the lender will still be able to get their money back. This is because a guarantor must make any repayments that the borrower defaults on. It also signifies trust in the buyer from someone who has already successfully got a foot on the property ladder.

It can also be helpful for home buyers with limited borrowing power or marks on their credit report, as well as first-time buyers who need some added security.

Are guarantor home loans the only option for first-home buyers?

First-home buyers might find some appeal in guarantor home loans and the lure of paying a low deposit, but there are other options for first-time entries to the property market.

If you are stepping into the world of real estate and do not think a guarantor home loan is right for you, you may have places to look beyond this. These include specific government schemes for first-time homeowners, like the First Home Owners Grant and the First Home Guarantee.

The First Home Guarantee functions explicitly similarly to a guarantor home loan, with a set amount of houses allotted per year wherein buyers only need a low deposit (of a 5% minimum), and the rest falls under a limited guarantee from the government.

Additionally, an OwnHome Deposit Boost Loan offers homeownership without the deposit. For just 1-2%* upfront, we will fund a full 20% deposit, which you can then pair with any 80% LVR home loan you're eligible to.

How are my loan repayments impacted by a guarantor coming off my home loan?

Theoretically, your guarantor being released from your home loan should not affect your regular mortgage repayments.

However, since most people wait to release a guarantor until they have an 80% LVR, you may meet eligibility criteria for lower interest rates. You should be sure to check the comparison rate for a representative rate that factors in any ongoing fees. A combination of improving your credit score, making extra repayments, and shifting LVR tiers could help you score a better interest rate.

A lower interest rate, in turn, means the potential to keep loan repayments down. All of this depends on the value of the property.

Should I be a guarantor on my family member’s home loan?

If you’ve been approached about being a guarantor for an immediate family member, there are a few key things to remember before you agree to it, as it is a significant commitment.

Locking in as a guarantor means that you cannot use your home equity as a resource if you want to redraw your equity, buy an investment property, sell your house, or do anything else that would involve tapping into your equity.

When you commit to being a guarantor, you also take on the responsibility of making repayments should the borrower default.

All of this can put quite a lot of stress on a family, as can most financial situations, so it’s important that all members of the arrangement know what is involved for them.

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Disclaimer
This article is intended to be general in nature and is not personal financial product advice. It does not take into account your objectives, financial situation, or needs. In particular, you should seek independent financial advice and read the relevant product disclosure statement (PDS), or other offer documents before making an investment decision in relation to a financial product (including a decision about whether to acquire or continue to hold).
Prepared by OwnHome Services Pty Ltd ACN 664 492 059. This information does not take your personal objectives, circumstances or needs into account. Always read the disclosure documents for products and services before deciding on a product or service, and consider seeking independent legal, financial, taxation or other advice for your unique circumstances.
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