Guarantor Home Loans Australia

These factors usually determine whether a guarantor home loan is approved, how much you can borrow and when the guarantee can be released.

A guarantee is not for a fixed term and the guarantor cannot simply withdraw it. It stays in place until the lender agrees to release it, which normally means one of two things has happened: your loan has fallen to about 80% of the property's current value, or the guaranteed amount has been repaid. Most borrowers get there through a mix of repayments and capital growth over two to five years, then ask the lender for a release.

The numbers you need to reach

Say you bought for $500,000 with a 100% loan and your parents guaranteed the top 20%, which is $100,000. The lender will usually release them once your loan is no more than 80% of a new valuation. If the loan is still around $480,000, the property needs to value at about $600,000. If the value has only reached $550,000, you would need to pay the loan down to about $440,000 or make up the gap with a lump sum. Watch the LMI trap: if you release the guarantor while the loan is still between 80% and 90% of value, the lender may approve the release but charge Lenders Mortgage Insurance on the portion above 80%, so compare that cost with waiting a little longer.

The steps with your current lender or a new one

• Ask the lender for the current guaranteed amount and your loan balance.
• Order a valuation of your property. Many lenders and brokers can arrange an upfront valuation before you commit, so you know whether the release will pass.
• Submit a formal release or discharge request. The lender reassesses the loan, then discharges its mortgage from the guarantor's title and ends the guarantee.
• Or refinance to a new lender at 80% LVR or below. The new loan is set up without the guarantee and the old mortgage over the guarantor's home is discharged at settlement. This often makes sense if your current rate is no longer competitive. See home loan refinancing.
• Budget for a valuation fee and the discharge fee on the guarantor's title. These are usually paid by the borrower. Allow several weeks from request to discharge.

If the equity is not there yet, the options are to pay a lump sum down to the release point, accept LMI on the portion above 80%, or keep paying and revalue in 12 months. A release is often pushed forward by life rather than numbers: parents who want to sell or borrow against their home, a separation, or family pressure to be released. If that is your situation, read the next section.

Yes, a guarantor can sell their property, but the lender holds a mortgage over it as security for the guarantee, and it will not release that mortgage at settlement until the guarantee has been dealt with. A sale cannot settle with the lender's mortgage still on the title, so this has to be sorted out before settlement day, not on it. There are three ways it is dealt with:

• Release outright. The lender revalues the child's property. If the loan is now at or below about 80% of value, or the child refinances to a loan that does not need a guarantee, the guarantee is released and the parents' sale proceeds are untouched.
• Pay out the guaranteed amount. If the equity is not there, the lender can take the guaranteed portion from the sale proceeds at settlement to reduce the child's loan to the point where the guarantee is no longer needed. Families then settle up between themselves.
• Substitute the security. The guarantee is moved to another property the parents own or are buying, such as a downsizer home, or in some cases to a term deposit held with the lender. The lender has to approve the new security first and the timing has to line up with both settlements.

What the parents are actually liable for

With a limited guarantee the parents are on the hook for the guaranteed amount, not the whole loan. The lender can only call on their home if the child defaults and the sale of the child's property leaves a shortfall, and only up to that capped figure. Selling does not change the amount, it just brings forward the day the lender needs it secured or repaid. Ask the lender in writing for the current guaranteed amount before listing, because the release decision turns on that number and the child's current loan balance, not on the original purchase.

Timing: speak to the lender before you list

The common mistake is listing the property, accepting an offer with a standard settlement period, and only then telling the lender. The lender needs weeks, not days: a valuation of the child's property, a credit reassessment if the child is refinancing, consent to any substitute security, and preparation of the discharge. Start the conversation before the campaign, and if a contract is signed before the release is confirmed, ask your conveyancer to negotiate a longer settlement. If the parents are moving into a retirement village or aged care and need the full sale proceeds for the entry payment or accommodation deposit, a release or substitution is far better than a payout from proceeds, which makes an early refinance of the child's loan the cleanest path.

The practical sequence

• Confirm the current guaranteed amount and the child's loan balance with the lender.
• Get the child's property valued to see whether the guarantee can go without any payout.
• Decide between release, payout from proceeds or substitution, and compare a refinance of the child's loan with staying put.
• Agree who pays the valuation and discharge fees, then give the conveyancer the lender's discharge timeline before a settlement date is fixed.

A broker can order an upfront valuation of the child's property, check whether the current lender will release or whether a refinance to a new lender gets the parents off the title sooner, and line that up with the sale so settlement is not held up. Tell us your situation and we will match you with a broker who handles guarantor releases.