Guarantor home loans are rising as more parents help their children crack the Australian property market earlier. As seen in 2021 data, where guarantor loans jumped by 21 per cent, it’s a no-brainer that more first-home buyers would want to jump right in.
But before you hop onto the bandwagon, you must know how to get out.A guarantor can be released from a home loan if you refinance or pay it in full. While that sounds easy, releasing the guarantor as early as possible is not always the best option.
Can I Remove A Guarantor Before the Loan Ends?
Yes, you don’t necessarily need a guarantor as security throughout the loan period. Besides, guarantor loans are designed to help the borrower get into the property market faster with the help of a guarantor.
But once you’ve already paid off a significant portion of the loan, you’ll find that the lender no longer needs your guarantor to provide additional security.
In most cases, guarantors stay on a mortgage for anywhere from 2-5 years and will vary depending on:
- How fast you pay down the entire loan: The faster you pay off the loan, the sooner you release the guarantee.
- How fast your property’s value appreciates: If the property’s value appreciates quickly, you’ll have enough equity to refinance and release the guarantee sooner.
How Can I Release the Guarantor?
Note that the guarantor is not automatically removed from the home loan. You must first satisfy the lender’s pre-set requirements before the guarantor is released.
Typically, the loan must be at 80% of the property’s value before the guarantor’s property can be released from the home loan. This is important to avoid paying for LMI after the release is initiated.
How Can I Avoid LMI With a Guarantor Home Loan?
Typically, you must contribute around 20% of the property value as a deposit (after stamp duty costs) to avoid paying LMI in a home loan. But with a guarantor home loan, the lender uses the guarantor’s asset (property) as collateral to cover the loan deposit and decrease the risk for the lender.
Guarantor loans are designed to help first-time home buyers who cannot make the 20% deposit qualify for their mortgage and skip LMI fees entirely.
Without a guarantor in place, borrowers who do not have a large enough deposit are required to pay LMI, which could amount to tens of thousands of dollars.
By having a guarantor as collateral for the loan, our senior mortgage brokers can negotiate to waive LMI and save you a significant amount in insurance costs.
Quick Example
Oliver wants to purchase a property worth $640,000 and has $64,000 in savings (after stamp duty costs), which is 10% of the property value.
Since he doesn’t meet the minimum 20% deposit requirement for a traditional home loan, Oliver must pay LMI to borrow the remaining 90% ($576,000). He doesn’t have extra savings for this and is also worried the property may sell to other buyers.
Fortunately, his father offers to be a guarantor by using $80,000 of his home’s equity as collateral for the loan. Now Oliver can borrow $576,000 without incurring LMI because the loan is now secured against a total security collateral of $720,000 ($640,000 from the purchase property & $80,000 from his father’s home). Adding this loan to his $64,000 savings, he now has enough funds to pay for the purchase without paying LMI.
Furthermore, should Oliver default on his loan repayments, his father becomes liable to cover the remaining balance as the guarantor, and the bank will retrieve this amount from the property’s equity guarantee ($80,000 in this example).
Before proceeding with a guarantor home loan, our senior mortgage brokers will sit with you and thoroughly discuss the risks, benefits, and how to navigate this financial commitment. The borrower and guarantor should fully understand the loan terms and policies before engaging with any agreement.
What are the criteria for releasing the guarantor?
Deciding to release the guarantee from your home loan means it should no longer serve as collateral. Without a collateral or loan security in place, you’ll need some other form of security to cover the loan.
In most cases, your loan-to-value ratio (LVR) should be at least 80% to demonstrate that the property has built up sufficient equity. Removing it at above 80% LVR, however, means LMI becomes applicable, and you’ll have to pay LMI fees to cover the risk.
Many lenders have roughly similar terms and policies, but our senior mortgage brokers will work with you to ensure that even the slightest difference favours your financial situation.
We’ll discuss your long-term goals and determine if strategically releasing your guarantor is the best course of action for a sustainable and convenient home loan.
When Is The Best Time To Release Your Guarantor
Based on our above criteria, the best time to release your home loan guarantor is once you’ve paid off 20% of the loan or higher. That puts your LVR at 80%, which is the baseline for LMI-free home loans in most banks and non-bank lenders.
Our panel has banks and lenders who will consider an LVR of 85% and higher for doctors, lawyers, accountants, and other professionals. But if you’re required to pay LMI, you’ll lose the purpose of having a guarantor in the first place and fall back to square one.
Before considering a family guarantor home loan, our senior mortgage brokers will discuss your best options with you and thoroughly explain the conditions of the loan guarantee.
Key Takeaways
If your family member or relative has agreed to onboard as the loan guarantor and you plan to release them eventually, give them a realistic timeline and ensure they understand the lender’s criteria for being released from the home loan.
Here are a few key takeaways about releasing a guarantor from the home loan:
- The guarantor is not automatically removed from the loan
- Refinancing, paying off the entire loan, and specific guarantee release provisions are different ways to release them as a guarantor. Note that LMI may be applicable in some cases where the LVR is above 80%.
Talk to our senior mortgage brokers at 1300 030 388 or enquire now, and we’ll discuss how releasing the guarantor applies to your unique financial situation.
