Removing a Guarantor
From Your Home Loan
A guarantor can help you get into the property market sooner, particularly when you have a smaller deposit. But as your home loan and property position improve, you may eventually want to remove the guarantor from the loan.
Understanding when and how this can happen can help you plan ahead and work towards greater financial independence.
When Can a Guarantor Be Removed?
Removing a guarantor generally depends on your lender's requirements, your loan balance, the property's value and your ability to meet the lender's lending criteria without the guarantee.
Property Value
An increase in your property's value may improve your equity position and help reduce the need for a guarantor.
Loan-to-Value Ratio
Your lender may require your loan-to-value ratio to fall within an acceptable range before releasing the guarantor.
Lender Assessment
The lender may reassess your financial position to determine whether the loan can continue without the guarantor.
Why Do People Use a Guarantor?
A guarantor can help a borrower purchase a property when they may not have enough deposit or equity to meet a lender's usual requirements.
In some situations, a family member may provide a limited guarantee to support part of the loan. This can help the borrower enter the property market sooner while keeping the guaranteed portion separate from the rest of the loan.
When Might You Be Able to Remove the Guarantor?
The timing can vary depending on the lender and your individual circumstances. A guarantor may be able to be released once your financial position and property equity are strong enough to meet the lender's requirements without the guarantee.
- Your property may have increased in value.
- You may have reduced the outstanding loan balance.
- Your equity position may have improved.
- Your income and financial position may now support the loan independently.
Understanding Your Loan-to-Value Ratio
Loan-to-value ratio, commonly known as LVR, compares the amount you owe on your home loan with the current value of your property.
As your property value increases or your loan balance decreases, your LVR may fall. A lower LVR can potentially make it easier to meet a lender's requirements without a guarantor.
The LVR required to release a guarantor can vary between lenders. Your lender may also consider valuation, income, expenses and other lending criteria.
How Does Property Growth Help?
Property value can play an important role in determining whether you still need a guarantor. If your property has increased in value since you purchased it, the additional equity may improve your overall lending position.
For example, if you originally purchased a property with family support and its value has increased over time, a new valuation may show that you now have enough equity to meet the lender's requirements without the guarantee.
What Happens When You Request a Guarantor Release?
The exact process depends on your lender. Generally, you will need to contact the lender or your mortgage broker and request an assessment for guarantor release.
- Your current loan and financial position may be reviewed.
- The property may need to be revalued.
- Your income and expenses may be reassessed.
- The lender may confirm whether the guarantee can be released.
Additional documents or information may be required before the lender can make a final decision.
Do You Need to Refinance to Remove a Guarantor?
Not necessarily. Some lenders may allow the guarantor to be released from the existing loan once their requirements have been met.
In other circumstances, refinancing may be considered if another lender offers a structure that better suits your current financial position.
Refinancing is not automatically the best option. It is important to compare interest rates, fees, loan features and the overall cost before making a decision.
Can a Mortgage Broker Help?
A mortgage broker can help you understand the potential steps involved in removing a guarantor and communicate with your lender about your options.
They may also help you compare your current loan with alternative lending options if refinancing could be appropriate for your circumstances.
What Should You Check Before Removing the Guarantor?
Before proceeding, make sure you understand the financial and administrative implications of the change.
- Confirm your current loan balance.
- Understand your property's current estimated value.
- Check your current LVR.
- Ask your lender about its guarantor release requirements.
- Review any applicable valuation, discharge or loan fees.
- Consider whether refinancing is necessary or beneficial.
Guarantor Release Checklist
- Check your current loan balance.
- Review your property's current value.
- Calculate your approximate LVR.
- Ask your lender about release requirements.
- Prepare updated financial documents if required.
- Understand any applicable fees.
Keep in Mind
- Guarantor release is not automatic.
- Lender requirements can vary.
- A new property valuation may be required.
- Your income and expenses may be reassessed.
- Property values can change over time.
- Refinancing may have additional costs.
Real Life Example
James purchased his first home with help from a family member who acted as guarantor because his deposit was relatively small.
Over the following years, James continued making his mortgage repayments while the value of his property increased.
When he believed he had built enough equity, he contacted his lender to find out whether the guarantee could be released.
James was then able to move forward with his home loan without relying on the original family guarantee.
Final Thoughts
Having a guarantor can be a valuable way to enter the property market sooner, but it does not necessarily mean the arrangement needs to continue for the entire life of your home loan.
As your loan balance decreases, your property value changes and your financial position improves, you may eventually be in a position to request the guarantor's release.
The process and requirements can vary between lenders, so it is important to understand your current LVR, property value, loan structure and the conditions attached to your guarantee.