Guarantor home loans are increasingly gaining popularity, but before you get caught up in the hype and jump right in, knowing how to get out is important.
You can release a guarantor through refinancing the home loan as soon as they meet the criteria set out by the lender. But releasing them as quickly as possible isn’t always the smart option.
In this article, we answer, ‘when can a guarantor be released off your home loan?’
How a Guarantor Home Loan Works to Avoid Lenders’ Mortgage Insurance
A guarantor home loan is a type of mortgage that allows a borrower to have a family member property to ct as additional security for the loan. The lender uses the guarantor’s property as collateral for the loan.
This type of loan is designed to help first-time home buyers who may not have a large enough deposit to qualify for a traditional mortgage or are looking to avoid paying Lenders’ Mortgage Insurance. In most cases, a lender requires a borrower to pay Lenders’ Mortgage Insurance (LMI) when they don’t have a sufficient deposit, which can be a significant additional expense.
In the case of a guarantor loan, the lender generally waives the requirement for LMI if the guarantor’s property is used as additional collateral for the loan. As such, it’s a viable alternative to having to fork out additional funds to fit the insurance bill.
Lucy has her eye on a lovely home worth $500,000 and has worked hard to save a deposit of $50,000 (10% of the property value).
Because she doesn’t meet the 20% requirement, Lucy has to pay LMI. She doesn’t want to pay this extra fee, but worries someone else will snap up her dream home. Fortunately, a guarantor loan can offer her a quick solution.
Her father offers to guarantee her home loan using $50,000 of his home’s equity. This way, Lucy has the 20% needed to avoid LMI costs—and get her application in ASAP!
If Lucy defaults on her loan repayments, her father would be liable for her as the guarantor.
You should note that being a guarantor is a serious commitment, and it can put the guarantor’s assets at risk if the borrower can’t repay the loan. As such, both the borrower and the guarantor need to fully understand the terms of the loan and the risks involved before entering into this type of agreement.
You may be interested in reading our Guide to Guarantor Loan Requirements in Australia.
Can you Remove a Guarantor From Your Loan?
Yes, it’s not always necessary to have your guarantor as security for the whole duration of the loan period. The idea of a guarantor loan is to help you with the push you need to get into the property market. Once you’ve paid off some of the loan, you might find that the lender no longer needs the additional security.
Generally, we find that guarantors stay on a mortgage for anywhere from two to five years, but the length of time will depend on a couple of factors:
- How quickly you pay down the loan: the faster you can pay off the loan, the sooner you’ll be able to remove the guarantee.
- How fast your property increases in value: if your property value increases rapidly, you can refinance and remove the guarantee sooner.
How Do You Remove a Guarantor?
The guarantee is not removed automatically, the loan will need to be at 80% of the value of your property to be able to remove the guarantors property out, this is so no LMI is involved.
Criteria For Releasing the Guarantee
Your loan-to-value ratio should be at least 890% to demonstrate that there’s sufficient equity in the property, which will act as collateral in case you’re unable to make your mortgage payments. Remember, removing the guarantor means that their property no longer serves as collateral, so the lender wants to have some other form of security for the loan.
Guarantors security can still be removed at above 80% LVR but LMI will be applicable in most cases.
While most lenders have similar policies, the criteria may slightly differ depending on where you took out the mortgage. So, make sure to check with the lender you’re working with to understand their specific requirements.
When Is the Best Time To Release Your Guarantor
Based on the criteria listed above, the optimal time to release the guarantor is once you’ve paid off 20% or more of the loan amount, which is when your LVR is sitting at 80%. With that said, some lenders will consider an LVR of 90% – if you pay LMI. So you’d essentially be back to square one.
Before getting your family members on board as a guarantor, you should explain to them that you’d ideally like to have them secure your loan until you’ve paid down the loan a sufficient amount so that your LVR sits at 80% before applying to release them.
If you have a relative who has agreed to sign on as a guarantor for your mortgage, make sure to discuss a realistic timeline with them and ensure that they are aware of exactly what the requirements are to release them:
- They’re not automatically removed at a certain point during the life of the loan
- Ideally, you should only apply to refinance and release them as a guarantor when your LVR is at 80% to ensure that you don’t have to cover the costs of the Lender’s Mortgage Insurance
- If you make additional payments to the mortgage to pay it off quicker, you can release them as early
Preferably, you should speak to a mortgage broker about how this applies to your unique situation. It may be helpful to set up a game plan with them and then have them help you with the refinancing process.
Contact Us For Help Working with Sufficient Equity & Releasing Guarantors from Your Home Loans
The Mortgage Agency is an Australian-based company specialising in helping borrowers navigate the complex world of guarantor loans and refinancing. We understand the unique challenges of securing a guarantor loan and are committed to making the process as smooth and stress-free as possible.
We offer a range of services, including:
- personalised loan assessments,
- expert advice on how to meet lender requirements, and
- guidance on how to remove the guarantee through refinancing.
And with access to a wide range of lenders and products, our mortgage brokers can help you find a loan that best suits your needs and financial situation.
So, whether you’re a first-time home buyer looking for a guarantor loan or an existing homeowner looking to refinance, contact us today to find out how we can help you achieve your goals.