Using a guarantor and the Family Security Guarantee

What you’ll learn

• What a guarantor is
• What a Family Security Guarantee is 
• How a family home guarantee can reduce borrowing costs
• Information for the loan guarantor
• Information for the home loan borrower
• Frequently asked questions about the Family Security Guarantee

What is a guarantor?

A guarantor is someone who’s promised or ‘guaranteed’ to provide backup to a borrower who is taking out a loan. This means that if the borrower stops paying the loan, the guarantor will need to make the repayments on some, or all of the loan. The loan guarantor must be able to afford to make the potential repayments. With a guarantor, there are advantages for the borrower. They may be able to save on certain costs or potentially take out a larger home loan because there’s backup security for part of the home loan.

What is a Family Security Guarantee?

A Family Security Guarantee allows an immediate family member to act as your loan guarantor. The loan guarantor secures a portion of the loan, so you potentially have more borrowing power. This can reduce your loan to value ratio (LVR) to under 80%, which means you won't need to pay Lenders Mortgage Insurance (LMI) on top of your deposit, saving you money. Your loan guarantor can choose cash (like savings or term deposit funds) or equity from their home to use as security. They won’t need to give any funds directly to the borrower.

An example of how a family home guarantee could reduce borrowing costs

Imagine you want to borrow $270,000 (to cover the loan amount and other costs, but not LMI) for a property valued at $300,000.

Loan Amount ÷ Property Value = LVR 
$270,000 ÷ $300,000 x 100 = 90%

With an LVR of 90%, LMI is applicable, which is an added cost. However, if you make use of the

Family Security Guarantee, and your guarantor agrees to provide $40,000 as additional security, the LVR on your loan reduces.

Loan Amount ÷ (Property value + Family Security Guarantee amount) = LVR
$270,000 ÷ ($300,000 + $40,000) x 100 = 79%

With a new LVR of 79%, LMI would no longer be required, which could be a significant saving.

For the loan guarantor

Types of security for the home loan guarantor

As a guarantor you can choose various ways to secure the guaranteed sum. You might secure the house deposit using your home’s equity, or a cash sum. If you choose to use cash, that amount can be put in a term deposit as a guarantee for your family member, to help them enter the market sooner.

Term deposits for your family loan guarantee

If you decide to put your cash into a term deposit to be held as a Family Security Guarantee against a home loan, the maximum deposit amount allowed is 20% of the guaranteed loan value. It’s available to personal customers only and the term deposit rate applicable is the standard advertised rate. Interest will be paid monthly or annually on deposits from $5,000.

After the initial term investment, the term deposit will continue to roll over until the required loan-to-value ratio (LVR) is achieved, and the guarantee can be released. Please note the term deposit must be opened in-branch or via Customer Care. Conditions, fees and charges apply.

You’ll be required to seek independent legal advice before offering to guarantee a loan.

You’ll also enjoy:

More options – As the guarantee is limited, you can choose the amount you would like to commit, up to 50% of the loan value.

More flexibility – You can be released from the guarantee as soon as the LVR drops below 80%. No need to wait until the loan is fully repaid.

Know the risks of being a guarantor for a home loan

If you’re thinking about becoming a loan guarantor in the Family Security Guarantee, there are a few things to be aware of first:

• It’s a big decision to make, so make sure you’re confident with the borrower’s financial situation (and yours). You should consider your current and future financial circumstances before you agree to be a guarantor.
• Keep in mind, a single guarantee can represent no more than 50% of the loan guarantor’s security.
• You’ll be liable for the amount you guarantee as the loan guarantor. That means you’re promising to pay Westpac that amount if the borrower can’t repay their loan and defaults. If you choose to use a term deposit as security, the whole deposit amount could be used, depending on the portion the borrower cannot repay. If you choose to use your home’s equity as security and don’t have cash to pay Westpac upfront if asked, your house may be sold to cover it.
• While acting as guarantor, your own ability to borrow may be reduced.

Make sure you read and understand the full terms and conditions of the guarantee agreement, and ensure you seek the mandatory independent legal and financial advice before making a decision and signing any documents. Westpac will require proof the guarantor has received independent advice as part of the loan process.

For the home loan borrower

As a borrower, what are the advantages of a loan guarantor?

With a Family Security Guarantee, you can enjoy the benefits of having part of your loan backed up by a guarantor:

• More borrowing power – Maximise the amount you can borrow; up to 100% of the purchase price, plus costs like stamp duty and legal fees.
• More to save – A guarantee can help you reduce or avoid LMI , saving you money.
• More choice – You may be able to enter the market sooner, with extra flexibility to choose the property that’s right for you.

Are you eligible for the Family Security Guarantee?

To be eligible, you must be looking to purchase or refinance a new home for yourself, or as an investment property.

Have you thought about home loans yet?

The Family Security Guarantee is available on a range of our home loans, for the purchase or refinance of owner-occupied or investment properties.

Note that, for investment properties, the borrower must not own any other properties at the time of application. For owner-occupied properties, a maximum of one other property may be owned which doesn’t have sufficient equity to provide as security.

Please speak to your lender for more information about your eligibility. Line of credit and bridging loan products are not eligible under the Family Security Guarantee, and they can’t be used for the purposes of debt consolidation, owner-builder construction, cash out, or adding a security guarantee to an existing loan.

Do you have a family member who might be interested in becoming a family loan guarantor?

A loan guarantor under the Family Security Guarantee may be a parent, legal guardian, sibling, or child aged over 18. It’s a big decision to make, so check they understand the benefits and risks, and ensure they’re confident about their current and future financial situation (and yours). Keep in mind, a single guarantee can represent no more than 50% of the guarantor’s security.

Are you on top of any expenses?

Make sure you’re aware of any extra buying costs, like stamp duty and legal fees. It’s critical that you have the budget to afford the loan, as the guarantee does not reduce or assist with home loan repayments.
 

Frequently asked questions

Who can be a guarantor for a Family Security Guarantee

Your parents, legal guardian, siblings, or child aged over 18.

How is a family home guarantee released?

The borrower or the guarantor can ask to be released from the guarantee at any time during the loan term. We’ll consider each request, but usually only if:

• The repayments for all borrowers' loans are satisfactory and
  
• The loan-to-value ratio is reduced to a point where LMI isn’t required, OR the borrower is prepared to pay an LMI premium.
  

When may the bank take action against a loan guarantor?

This would only be a last resort, if action against the borrower has been unsuccessful. Please see our Information Statement (PDF 68KB) for more information.

How does the bank determine the amount of the guarantee?

This amount depends on a number of factors, such as:

• The proposed loan amount
• The value of the proposed property to be guaranteed
• Equity already held by the guarantor
• The maximum guarantee that can be considered
  

What are the next steps if you are thinking of applying for a Family Security Guarantee?

Our guide documents are a good way to start a conversation with someone in your family who may be willing and able to become your loan guarantor. They could help you both learn more about the benefits and risks of a family home guarantee.

• Check out this guide (PDF 258KB) for detailed explanations and examples.
• For a rundown of all the nitty-gritty, here’s an Information Statement for family members (PDF 68KB) 
  

Get in touch with a specialist

We’d love to hear from you. Chat to one of our Home Lending Specialists or your lender to work out if the Family Security Guarantee is right for you. Get in touch!