Guarantor Loans Explained: How Family Can Help You Buy

What is a Guarantor Home Loan?

If you're a professional in Queenstown looking to buy your first home but struggling with the deposit requirement, a guarantor loan might be worth considering. This type of home loan allows a family member - usually a parent - to use the equity in their property as additional security for your mortgage.

Think of it as your family member putting their hand up to support your home loan application. They're not giving you money directly, but they're offering their property as a safety net for the lender. This can help you avoid paying a Low Equity Premium (LEP) or even get into the property market with a smaller deposit than you'd normally need.

How Does a Guarantor Loan Work?

When you apply for a home loan with a guarantor, the lender looks at both your financial position and your guarantor's property equity. Here's what typically happens:

1. You apply for a home mortgage with one of the major banks like ANZ, ASB, BNZ, Westpac, or Kiwibank
2. Your guarantor (often a parent or close family member) agrees to use their property as security
3. The lender assesses both your borrowing capacity and your guarantor's financial position
4. If approved, you can borrow more than you would on your own, potentially up to 95% LVR or even 100% LVR in some cases
5. Your guarantor is only liable for a portion of the loan - usually the amount that exceeds 80% LVR

The key thing to understand is that your guarantor isn't responsible for your entire home loan. They're typically only guaranteeing the portion that represents the higher loan to value ratio. For instance, if you're borrowing at 90% LVR, they might only guarantee the top 10-15% of the loan amount.

Benefits of Using a Guarantor

For many professionals working in Queenstown's dynamic property market, guarantor loans offer several advantages:

Enter the Market Sooner: You don't need to wait years to save a full 20% deposit. With a 5% deposit or even 10% deposit, you could be buying your first home much sooner.

Avoid Low Equity Margins: When you borrow above 80% LVR, banks typically charge a low equity margin (LEM) which increases your interest rate. A guarantor can help you avoid this additional cost.

Access Better Rates: By reducing the lender's risk, you might qualify for more competitive rates on your home loan New Zealand lenders offer.

Increase Borrowing Capacity: A guarantor can help boost how much you can borrow, potentially opening up more property options in your price range.

Risks and Considerations

While guarantor loans can be incredibly helpful, they're not without risks - particularly for your guarantor. Here's what everyone needs to consider:

For Guarantors:

• If you can't make your mortgage repayments, your guarantor becomes responsible for the guaranteed portion
• Their property is at risk if they can't cover the shortfall
• It can affect their own borrowing capacity if they want to refinance or take out additional loans
• The guarantee typically stays in place until you've built up enough equity (usually when you reach 80% LVR)

For Borrowers:

• You need to be confident in your ability to make repayments - someone you care about is on the line
• You'll still need to prove your borrowing capacity through income and expenses
• Not all lenders offer the same guarantor loan terms

When Does a Guarantor Loan Make Sense?

Guarantor loans work particularly well for professionals in stable employment who have good income but haven't had time to save a large deposit. If you're working in Queenstown's hospitality, tourism, or professional services sectors with a solid income and job security, but house prices have been climbing faster than your savings, this could be a viable option.

They're often used for:

• First home loans when you want to avoid LEP charges
• Upgrader loans when you're moving to a larger property
• Owner occupied home loans where you'll be living in the property

Types of Home Loans Available with a Guarantor

Once you're approved for a guarantor home loan, you'll still need to choose the right loan structure. A mortgage adviser can help you decide between:

Fixed Rate Mortgages: Lock in your interest rate for 1 year fixed, 2 year fixed, 3 year fixed, or even 5 year fixed terms. This gives you certainty around your repayments.

Floating Rate Mortgages: Your mortgage rate moves with the market. This offers flexibility for extra repayments and lump sum payments without penalty.

Split Loans: Many borrowers choose a combination loan, splitting their home loan between fixed rate and floating rate portions to balance security and flexibility.

Loan Features: Consider whether you want home loan features like an offset mortgage, revolving credit, or redraw facility to help manage your finances.

Most guarantor loans are structured as principal and interest (or table loans), though interest only loans might be available in certain circumstances.

Removing the Guarantor

The good news is that guarantor arrangements don't last forever. Once you've built up enough equity in your property - typically when your LVR drops to 80% or below - you can usually apply to have the guarantor removed. This might happen through:

• Regular mortgage repayments reducing your loan balance
• Your property increasing in value
• Making additional lump sum payments or extra repayments
• A combination of these factors

Most borrowers aim to release their guarantor as quickly as possible. Using home loan features like a redraw facility or offset mortgage can help you pay down your loan faster.

Working with a Mortgage Broker

Navigating guarantor loans requires expertise. Different banks and lenders have varying policies, and current rates can differ significantly. A mortgage broker who understands the NZ home loan market can:

• Compare options across multiple lenders
• Explain the specific guarantor requirements for each bank
• Use a borrowing calculator to show you how much you can borrow
• Help structure your residential mortgage for optimal outcomes
• Ensure both you and your guarantor understand the commitment

At Finance Broker New Zealand, we specialise in helping Queenstown professionals find the right home loan solution for their circumstances. Whether you're looking at guarantor loans, investment loans, or exploring refinancing options, we're here to provide expert guidance.

Getting Started

If you're considering a guarantor home loan, the first step is having an honest conversation with your potential guarantor. They need to understand the commitment and be comfortable with the arrangement. Then, speak with a professional who can assess your situation and provide tailored advice.

With property prices in Queenstown remaining strong, waiting to save a full 20% deposit might mean missing out on opportunities. A guarantor loan could be the solution that gets you into your own home sooner, while setting you up for long-term financial success.

Call one of our team or book an appointment at a time that works for you. We'll walk you through your options, run the numbers using a repayment calculator, and help you make an informed decision about whether a guarantor loan is right for your situation.