With the cost of owning a home so far out of reach for so many Australians, many Aussies will opt for a guarantor home loan: an immediate family member or close friend uses equity on their home to act as security on a new home loan.
While this can make things a lot easier for first-home buyers navigating the property market, it can also lead to many questions for borrowers. Namely, how long does my guarantor stay on my home loan?
How long does a guarantor stay on a home loan in Australia?
There is no fixed amount of time for a guarantor to stay on a home loan in Australia, but most guarantors tend to stay on the home loans in question for two to five years.
This depends on many factors, like how quickly the loan is paid off (which will depend on your loan amount and if you are taking any extra home loan repayments) and any change in the property value.
Your guarantor will not be automatically removed from your home loan - this process must be done through internal refinancing.
This means you can actually choose when to take your guarantor off your home loan, which will typically be done when you have enough equity that you no longer need the security a guarantor provides or when your loan-to-value ratio (LVR) is high enough that your lender will accept you as a borrower without a guarantor.
LVR video
When is the best time to take your guarantor off your home loan?
There is no ideal time to remove a guarantor from your home loan, but there are things you should check for as you make that decision. You’ll want to wait for these key things to be in place:
- When you have over 80% LVR: You will not want to remove a guarantor from your loan before you have a loan-to-value ratio of 90% (meaning you have paid 10% of the purchase price of the home). With 20% being the recommended home loan deposit in Australia, releasing a guarantor before you have an LVR of 80% will result in you needing to pay lenders mortgage insurance (LMI). This can be quite a significant cost on top of the value of your property.
- Calculate your LVR with the OwnHome loan-to-value ratio calculator
- When you’re eligible for better interest rates: When you have paid a greater portion of the loan, your changed LVR tier may also entitle you to lower interest rates on your home loan. If your interest rate is calculated off of risk-based pricing, you could also do work in this time to look into your credit history and improve your credit score. By working to pay off any debts owing and improving your financial situation, you could improve your eligibility for lower interest rates and the resulting lower mortgage repayments.
- When your guarantor wants to use their home equity for other things: Though it might be appealing to keep your guarantor on your home loan for as long as possible as a safety net, it’s important to remember that your guarantor’s property has value to them as well. While they are acting as guarantors, they may be unable to sell their own property should they want to move, purchase an investment property, or use home equity to finance ventures like retirement. This can place a lot of stress on a relationship and is one of the many reasons guarantors do not tend to stay on a loan for more than five years.
How do I remove a guarantor from my home loan?
Removing a guarantor from your home loan may operate differently depending on your specific mortgage, but the essential steps will remain the same.
- First, you’ll need to speak to your mortgage broker (if relevant) to get the ball rolling and seek the relevant financial advice.
- Check you meet any eligibility or loan requirements for internal refinancing.
- Your lender or bank will most likely arrange a property valuation.
- You will need to confirm the total loan amount.
- Depending on your LVR, you’ll submit either an internal refinance (if your LVR remains over 80%) or potentially a partial release (for loan-to-value ratios below 80%). The waiting period for processing can be upwards of a week.
- You’ll complete the internal refinance or property release, after which your guarantor can reclaim their home equity.
Costs involved in removing your guarantor
There will be some costs attached to removing a guarantor from a home loan, most notably any fees attached to property valuation, legal fees, mortgage broker fees, and any administrative fees involved in the process. There may also be some government fees attached to any transference of deeds.
If you are releasing the guarantor before you have sufficient equity in your own home, you may have to contend with lenders mortgage insurance (LMI) as well. This is why people tend to wait until they have paid 20% of the entire loan, as LMI is only required for homeowners with under 80% loan-to-value ratios. LMI can cost up to tens of thousands of dollars, similar to stamp duty in its magnitude, so avoiding this is always ideal.
