Guarantor Loans: The Pros and Cons Explained

A guarantor loan lets you borrow money to buy a property when you don't have a full deposit, with a family member using equity in their own home as security.

For first home buyers in Hamilton, this often means the difference between waiting another two years to save a bigger deposit or moving into your own place within months. The guarantor doesn't hand over cash. They're offering their property as additional security so the lender feels comfortable approving your application even though you're coming in with 5% or 10% saved rather than the usual 20%.

How a Guarantor Loan Works in Practice

The lender takes security over both your new property and a portion of your guarantor's property. Consider a buyer purchasing a townhouse in Frankton with a 10% deposit. The lender might secure the loan against the full value of that townhouse plus $80,000 of equity in the guarantor's Rototuna home. If the buyer has $50,000 saved toward a $500,000 purchase, the lender is covered for the shortfall without charging a Low Equity Premium.

The guarantor is liable for the portion they guarantee, not the entire loan. That $80,000 figure stays fixed unless the loan structure changes. Once the buyer builds enough equity through repayments and property value growth, the guarantee can be removed entirely, often within two to five years depending on market conditions and how aggressively the buyer pays down the mortgage.

The Main Advantage: Avoiding Low Equity Premiums

You skip the LEP, which is the fee charged when you borrow more than 80% of a property's value. That premium typically adds between 0.25% and 1.50% per year to your interest rate on the portion of the loan above 80% LVR. On a $450,000 loan with a 10% deposit, avoiding the LEP could save you several thousand dollars over the first few years, depending on your lender and the exact margin they would have applied.

The other benefit is timing. Saving an extra 10% deposit on a $500,000 property in Hamilton means finding another $50,000, which at current wage levels and rent prices might take two or three years. A guarantor removes that wait. You're in the market now, building equity in your own place rather than rent receipts.

Risks for the Guarantor

The guarantor's property is on the line for the amount they guarantee. If the borrower can't meet repayments and the property is sold at a loss, the lender can claim against the guarantor's home to recover the shortfall. In a falling market, that risk increases. If a property bought for $500,000 sells for $420,000 after costs, and the buyer still owes $460,000, the guarantor covers that $40,000 gap from their own equity or savings.

This also affects the guarantor's borrowing capacity. That $80,000 guarantee reduces how much they can borrow for their own needs, whether that's renovating, upgrading, or helping another family member down the line. Some guarantors don't realise this until they apply for finance themselves and discover their options are limited until the guarantee is removed.

Relationships can strain under financial pressure. If the borrower misses repayments or the guarantor wants to sell their own home but can't because of the guarantee, it creates tension that's hard to undo. Having a clear exit plan before signing anything makes a difference.

Risks for the Borrower

You're borrowing at a higher LVR, which means less equity buffer if property values drop. If you need to sell within the first few years and the market has softened, you could be in negative equity, owing more than the property is worth. That makes selling difficult without bringing cash to settlement, and it keeps the guarantor locked in until the debt is cleared.

Some borrowers also feel pressure to keep the guarantor happy, even when it's not in their own interest. You might avoid refinancing to a better rate or restructuring your loan because it requires the guarantor's consent and you don't want to bother them. That can cost you thousands over the life of the mortgage.

When a Guarantee Can Be Removed

Most lenders allow you to remove the guarantee once your LVR drops to 80% or below. That happens through a combination of paying down the loan and property value growth. If you bought at $500,000 with a $450,000 loan and the property is now valued at $550,000, your LVR has dropped to around 82%, depending on how much you've repaid. Another $10,000 in repayments or a small valuation increase gets you there.

Removing the guarantee requires a new valuation and sometimes a fresh credit check. The lender needs to confirm you can service the loan on your own. If your income has increased or you've taken on new debt since the original approval, that affects the outcome. It's worth reviewing your position with a mortgage adviser about 18 months after settlement to see where you stand and what's required to release the guarantor.

Alternatives to a Guarantor Loan

Some buyers use a combination of KiwiSaver, the First Home Grant if eligible, and a smaller loan to get across the line without involving family. Others wait and save a larger deposit, accepting the time cost in exchange for full independence. If your income is strong and steady, paying the LEP for a year or two might be preferable to the complexity of a guarantee, particularly if your family's financial situation is uncertain or their equity is tied up in their own mortgage.

Another option is a gifted deposit, where a family member gives you cash rather than offering security. This avoids the ongoing liability for them, though it requires them to have accessible savings rather than equity locked in property. Lenders treat genuine gifts differently from loans between family members, so documentation matters.

What Lenders Look for in a Guarantor

The guarantor needs sufficient equity in their own property, a clean credit history, and the income to service their existing commitments plus the guaranteed portion if required. Most lenders want to see at least 20% equity remaining in the guarantor's property after the guarantee is applied. If they're recently retired or approaching retirement, some lenders get cautious about ongoing serviceability, even if they have significant equity.

The guarantor will go through a full application process, including credit checks, income verification, and a property valuation. They'll need independent legal advice before signing the guarantee document. This is a legal requirement in New Zealand, and it protects both parties by making sure the guarantor understands exactly what they're agreeing to.

If you're considering a guarantor arrangement and you're based in Hamilton, it's worth sitting down with both parties present so everyone hears the same information at the same time. Assumptions about how the guarantee works or when it ends cause most of the problems we see after settlement. Getting it clear up front, with a written plan for removing the guarantee, keeps things on track.

Call one of our team or book an appointment at a time that works for you. We'll walk through your situation, run the numbers with and without a guarantor, and help you figure out whether it makes sense for your circumstances and your family's.

Frequently Asked Questions