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Guarantor mortgages

Learn how the mortgage guarantor process works.

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By

Richard Whitten

&

Alison Loveder

Updated

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Name Product Standard Rates From (p.a.) Special Rates From (p.a) Loan Terms Available Application Fee
ANZ Fixed Rate Home Loan
ANZ Fixed Rate Home Loan
5.95%
5.35%
6 months to 5 years
N/A
More Info
ASB Fixed Rate Home Loan
ASB Fixed Rate Home Loan
5.25%
N/A
6 months to 5 years
$150 - $400
More Info
The Co-operative Bank Fixed Rate Home Loan
The Co-operative Bank Fixed Rate Home Loan
5.59%
5.09%
6 months to 5 years
$240
More Info
HSBC Fixed Rate Home Loan
HSBC Fixed Rate Home Loan
6.44%
N/A
6 months to 5 years
$250
More Info
Kiwibank Fixed Rate Home Loan
Kiwibank Fixed Rate Home Loan
5.95%
4.95%
6 months to 5 years
N/A
More Info
Resimac Fixed Rate Home Loan
Resimac Fixed Rate Home Loan
6.44%
N/A
1 to 5 years
$399
Interest rate depends on available equity, term length and credit status.
More Info
SBS Fixed Rate Home Loan
SBS Fixed Rate Home Loan
5.45%
4.95%
6 months to 5 years
$250
More Info
TSB Fixed Rate Home Loan
TSB Fixed Rate Home Loan
7.09%
6.29%
6 months to 5 years
N/A
More Info
Westpac Fixed Rate Home Loan
Westpac Fixed Rate Home Loan
5.95%
5.35%
6 months to 5 years
$140
More Info
ANZ Floating Rate Home Loan
ANZ Floating Rate Home Loan
6.34%
N/A
N/A
N/A
More Info
ASB Floating Rate Home Loan
ASB Floating Rate Home Loan
6.35%
N/A
N/A
$150 - $400
More Info
The Co-operative Bank Floating Rate Home Loan
The Co-operative Bank Floating Rate Home Loan
6.25%
6.25%
N/A
$260
More Info
HSBC Floating Rate Home Loan
HSBC Floating Rate Home Loan
7.94%
N/A
N/A
$250
More Info
Kiwibank Floating Rate Home Loan
Kiwibank Floating Rate Home Loan
6.00%
6.00%
N/A
N/A
More Info
Resimac Floating Rate Home Loan
Resimac Floating Rate Home Loan
5.59%
N/A
N/A
$399
Interest rate depends on available equity.
More Info
SBS Floating Rate Home Loan
SBS Floating Rate Home Loan
7.99%
N/A
6 months to 5 years
$250
More Info
TSB Floating Rate Home Loan
TSB Floating Rate Home Loan
7.05%
6.25%
N/A
N/A
More Info
Westpac Floating Rate Home Loan
Westpac Floating Rate Home Loan
6.39%
N/A
N/A
$140
More Info
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Having a family member who owns property act as your guarantor means you can get a mortgage more easily. You don’t need to save all or some of the 20% of the property’s price and can avoid a hefty lenders’ mortgage insurance premium. However, there are risks. It also means that if you can’t repay your mortgage, your guarantor may have to – so they need to be prepared to take on that risk. Here’s how guarantor mortgages work and how to find out if you’re eligible.

Types of mortgage guarantee

Limited guarantee – this places a limit on the guarantee. Some lenders agree to limit the guarantee to only the amount you need. For example, a home buyer has a 10% deposit and needs another 10%. So, the lender limits the guarantee to the sum that makes up the other ten per cent, which gives a 20% deposit for the new home.

Unlimited guarantee guarantees the entire mortgage amount and may even cover the future loans etc, of the person being guaranteed. This scenario is less desirable for the person who is the guarantor, and they need to consider it carefully.

How does a guarantor mortgage work?


If you have a close family member with equity in their property (that means they own all or most of the property), they can guarantee your deposit. Of course, you still need to borrow money from a lender and repay it, but the guarantor provides security.

That’s the catch: if you can’t repay the mortgage, your guarantor may have to.

To minimise risks, a guarantor can guarantee a portion of a mortgage, say, 20%. Once the borrower has repaid 20% of the loan (or the property has increased in value and now has 20% equity), the guarantor’s property is safe even if the borrower fails to repay the remaining 80%.

Let’s look at the process with an example guarantor scenario:

Guarantor mortgage scenario

Sad couple sitting on a couch.

  • John and Rachel purchase a $600,000 apartment with a 5% deposit ($30,000).
  • They estimate their lenders’ mortgage insurance (LMI) premium using an online calculator and are shocked to learn they need to pay $25,000.
  • Rachel’s parents own their home outright, and they agree to guarantee a further 15% ($90,000) of the property cost, which eliminates the LMI cost.
  • John and Rachel repay $150,000 of their mortgage over the next few years. In addition, Rachel’s parents are no longer liable because the $90,000 they guaranteed has been repaid.

How much can I borrow with a guarantor?

With a guarantor, many lenders let you borrow up to 100% of the value of a property. They may even allow up to 110%, which is enough to cover other expenses like moving costs.

If you have a 5% deposit saved, having your parents guarantee a further 15% of the deposit means you can avoid paying LMI.

To find out if you’re eligible for a guarantor mortgage, first speak to your parents or whoever you’re asking to guarantor your loan to confirm they’re willing to be involved. Next, you need to find out how much their property is worth and how much their mortgage is, allowing you to determine how much equity they have available.

For example:

  • If their home is worth $700,000 and their loan is $450,000, they have $250,000 equity, which should be enough to guarantee part of your deposit.
  • If their home is worth $700,000 and their loan is $600,000, they only have $100,000 equity – which may not be enough to help.
  • The more equity they have, the greater the chance that the bank will accept them as a guarantor on your mortgage.

Once you’ve worked out that your guarantor has enough equity to help you, approach your bank or lender and see what their specific mortgage criteria are. Some lenders may require borrowers to have at least 5% of a deposit in genuine savings, even with a guarantor.

Who can act as a guarantor?

Some lenders only accept parents as guarantors, while others accept close relatives. Every lender has different requirements, but the following criteria usually apply:

  • Finances and credit. A guarantor needs equity in their property, a stable income, and a good credit rating to satisfy lenders.
  • Residency. Lenders typically want a guarantor to be a New Zealand citizen or permanent resident.
  • Age. A guarantor must be over 18 and usually under 65.

Risks and benefits of a guarantor mortgage

For the right borrower having a guarantor is a huge help. However, if you cannot make a mortgage repayment, your guarantor’s property might ultimately become the bank’s property.

Benefits

  • Get into the property market faster. Once you’re in the market and paying off your mortgage, you can build up equity and enjoy capital gains if the property grows in value. On the other hand, if you spend more time saving up a 20% deposit without a guarantor, the property might increase in value, and you need to save even more.
  • Avoid LMI. Lenders mortgage insurance can add thousands of dollars to your mortgage. A guarantor loan takes this cost out of the equation.
  • Improve your chance of getting mortgage approval. Having a guarantor strengthens your mortgage application and improves your odds of acceptance.

Risks

  • Your property is at risk. The guarantor risks their property if the borrower can’t repay their mortgage. It’s a serious risk, and both borrower and guarantor need to understand it fully before entering a guarantor arrangement.
  • You could be tied together for longer than expected. For example, if the property market stagnates and you get no property price growth, it can take years to make enough payments to “release” the guarantor from the property.
  • Relationship strain. Mixing family and financial relationships can cause severe emotional pressure. Therefore, you should evaluate not only your finances but your relationship beforehand.
Thankfully, a guarantor is only liable to repay the amount they guarantee. Once that amount is refunded, the guarantor is released from further liability (the borrower is not).

Planning to act as guarantor for your child. Ask these questions first

  • Can I afford to go guarantor? Assess your financial situation realistically. While you shouldn’t have to spend a cent, you do need to plan for a scenario where you suddenly become liable for the total amount you’ve guaranteed.
  • Can the borrower afford this mortgage? Try to assess the borrower’s financial situation as clearly as possible. Don’t make this judgement on instinct either: ask for hard evidence. You can request to see bank statements and a copy of their credit report, but it’s up to the borrower to share these with you.
  • How is your relationship with the borrower? Unfortunately, just because you are a close family doesn’t mean you get along all the time. Plus, with large sums of money involved, even good relationships can become strained.
  • Have I sought professional advice? Get independent legal advice to make sure you fully understand the guarantor process guarantor for your child. Ask these questions first

How is a guarantor “released” from a mortgage?

Usually, you can apply to release the guarantor from the mortgage once the borrower has at least 20% equity in the property.

With 20% equity, you won’t have to pay LMI, and your chances of getting the mortgage approved are reasonable. However, if your equity is less and yourloan to value ratiois higher, say 85-90%, then you might have trouble getting your guarantor released.

To remove the guarantor, contact your lender, and they conduct a valuation on the property. Depending on the valuation results, your next step is to wait (if there’s not enough equity) or apply with the lender to have the guarantor released.

Your bank may charge some administrative or settlement fees. In addition, if you are required to pay LMI (if your loan is above 80%), you need to fund this too.

    What are my options if I can’t get a guarantor?

    Having a parent who can guarantee your deposit is a privilege that many borrowers don’t have. Your parents may be able to help in other ways, or you may have to go it alone. Here are some options:

    • A low deposit mortgage.Low deposit mortgages let you borrow up to 95%, but LMI can be expensive. However, you can capitalise on LMI costs, meaning you fold the premiums into your mortgage and repay both together.
    • Co-buying. A co-borrowing arrangement means getting a mortgage with your parents and buying a property together. You and your parents are liable to repay the entire loan. However, these ownership arrangements can be complicated.
    • “Rentvest”. If you can’t afford a home where you want to live, you could buy a cheaper property elsewhere and rent it out. So you’re building wealth through an affordable investment while living somewhere else.
    • Keep on saving. You can also keep scraping a bigger deposit together. Here are some strategies to help you build your deposit.

    A mortgage broker may be able to help you navigate your options as a borrower, whether you need a guarantor or not.

    Find out about mortgage brokers

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