Guarantor Home Loans: Avoid LMI With a Family Guarantee

How much guarantee do you need?

Enough to bring your LVR to 80% on the lender's own measure, and lenders measure it two ways.

First home buyer? The 5% Deposit Scheme removes LMI with a 5% deposit (2% for single parents), with no one else's home at stake. Check it before you ask family.

Why do lenders ask for different amounts?

Lenders publish two ways of measuring the LVR with a guarantee, and the second always needs a guarantee 25% larger.

Method 1: the gap to 80% of the value

The guarantee covers the loan above 80% of the value. In NAB's example, a $90,000 guarantee on a $600,000 home with a $30,000 deposit gives "an effective loan to value ratio (LVR) of 80%". ANZ, CommBank and BOQ examples work the same way.

Method 2: combined security

Westpac and the St.George group divide the loan by the property value plus the guarantee: "$270,000 ÷ ($300,000 + $40,000) x 100 = 79%". APRA's APS 112 likewise has banks use the combined value when several properties secure one loan. Solve that formula for 80% and the guarantee is 25% larger than under method 1 (our arithmetic). St.George's Family Pledge example uses $56,500 where method 1 gives $45,000.

With no deposit there is no LMI figure to avoid: the guarantee is what makes the loan possible. The lender makes the final call, and Westpac says the amount "depends on a number of factors". CommBank says LMI is generally not available with a guarantor, so plan on the guarantee covering the whole gap.

How does a guarantor home loan work?

The guarantor lets the lender take extra security, usually a mortgage over their home, for part of your loan. You borrow and repay the whole loan yourself. Westpac says guarantors "won't need to give any funds directly to the borrower". Bankwest, BOQ and CommBank split the borrowing into a loan of about 80% of the value and a smaller loan the guarantee secures.

• Security guarantee. The guarantor's home becomes extra security, the usual kind; NAB says the guarantor "doesn't provide any cash payments". If they still have a mortgage, their own lender may have to consent to a second mortgage, as Macquarie's broker help describes.
• Cash guarantee. Westpac takes cash in a Westpac term deposit, up to 20% of the guaranteed loan value, and "the guarantee must be released prior to accessing any of the principal deposit amount". CommBank also accepts cash. The home stays out of it, but the money is locked until release.

Which lenders offer guarantor loans?

Most big banks, under different names and rules. Macquarie accepts only a spouse as guarantor, and we found no family guarantee product at Suncorp Bank or Bendigo Bank. Every lender that lists who can guarantee takes a parent and a sibling. None lists a friend.

The hard catches

• Bankwest: if the guarantor's home loan is with another lender, "they'll need to move their loan to us."
• BOQ: first home buyers only, a guarantor with a mortgage-free home and an income, and you must repay without their income.
• Westpac: a cash guarantee is locked until release, a guarantee cannot be added to an existing loan, and an investment purchase needs you to own no other property.

What are the risks for the guarantor?

If you are the parent reading this on your own, this part is for you, in the banks' and Moneysmart's own words. You promise to pay the guaranteed amount if the borrower cannot, and your home stands behind that promise.

• You can be asked to pay. Moneysmart: "A guarantor agrees to repay the loan if the borrower can't. You may have to repay all of it."
• Your home can be sold. Westpac: "If you choose to use your home's equity as security and don't have cash to pay Westpac upfront if asked, your house may be sold to cover it."
• A cap helps, but it is not a shield. Moneysmart: "This may limit what you owe, but you could still lose an asset you use as security." NAB says the maximum can be "a set amount or all amounts owing under the loan you're guaranteeing, plus interest, costs and other amounts", so check which yours is.
• Your borrowing and credit. Westpac: "your own ability to borrow may be reduced". ANZ: "being a guarantor can impact your credit score".

If the borrower stops paying

CommBank will "first seek to recover the debt from the borrower", through the sale of their property, before turning to your security, unless it expects a substantial amount would still be owing. Westpac calls action against the guarantor "a last resort". In CommBank's example, a home sold for $415,000 with $452,000 owing and $10,000 in sale costs leaves the guarantor $47,000 to pay.

Before you sign

• Westpac's statement to guarantors: "Your guarantee is not enforceable unless you get a copy of the credit contract or proposed credit contract before you sign." You can withdraw in writing if the final contract is materially different.
• NAB and ANZ give you at least three days with the documents, unless you get independent legal advice sooner.
• Moneysmart: "If someone pressures you to go guarantor on a loan, this may be a sign of financial abuse."
• Moneysmart: "Ask the lender to confirm the exact amount, when it may reduce, and when it can end."

How do you release a guarantor?

You apply once your loan falls to about 80% of the property's value: a balance of $560,000 on a $700,000 home. Repayments, extra payments and a rise in value all count, but a rise counts only once the lender re-values. Under APS 112 a bank keeps the value from when your loan started unless, for example, it gets an updated valuation in a new loan application. NAB describes release as an internal refinance or formal review. Heritage lets either party request a re-valuation, for a fee.

Legal advice for the guarantor

Every lender that addresses it requires or recommends independent legal advice. Westpac makes legal and financial advice mandatory, with proof. CommBank requires legal advice and a statutory declaration. St.George, BOQ and Macquarie require it, and Suncorp Bank says it "cannot be provided by the borrower's solicitor". ANZ strongly recommends it.

Guarantor loan, 5% Deposit Scheme or Help to Buy?

All three remove LMI. The difference is who carries the gap: a relative's home, a government guarantee, or a government equity share.

The two government schemes cannot be used together. See the 5% Deposit Scheme and the Help to Buy scheme for the full rules.

The Family Home Guarantee is not a family guarantee

It is the legal name, in the Housing Australia Investment Mandate, of the 5% Deposit Scheme's single parent stream: see Family Home Guarantee. It lets eligible single parents and legal guardians buy with a 2% deposit and no LMI, and no relative's property is involved. Bendigo Bank's old family home guarantee address now opens its 5% Deposit Scheme page for single parents.

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