A guarantor can potentially be removed from a home loan, but the release does not usually happen automatically. The lender will generally need to be satisfied that the guarantee is no longer required and formally release the guarantor from their obligations.
For many family guarantor home loans, the arrangement is not necessarily intended to last for the entire life of the mortgage. A parent may have provided a guarantee because their child did not have a sufficient deposit or enough equity when purchasing a property. As the borrower makes repayments and builds equity, there may come a point where the lender is prepared to continue the home loan without the additional security provided by the guarantor.
The timing and requirements for a release will depend on the particular loan, lender and guarantee documents. A borrower having made repayments for several years does not, by itself, bring the guarantee to an end, nor should a guarantor assume they have been released because the property has increased in value.
If you are considering becoming a guarantor, understanding how and when the guarantee may eventually end should form part of the discussion when obtaining independent guarantor legal advice before you sign.
When Can a Guarantor Be Removed from a Home Loan?
Whether a guarantor can be removed will generally depend on whether the lender is prepared to continue the home loan without the additional security that was originally provided.
Family guarantees are commonly used where a borrower does not have a large enough deposit to meet the lender’s requirements on their own. A parent may agree to use some of the equity in their own property as additional security, allowing their child to purchase a home without having to provide the same amount of savings upfront.
The position can look quite different several years later. Regular repayments reduce the outstanding loan balance, additional repayments may reduce it further, and changes in the property’s value can affect the amount of equity the borrower has accumulated.
Consider a borrower who purchases a property for $600,000 with a $540,000 home loan and receives assistance from a parent through a family guarantee. If the loan balance later falls to $470,000 and the property is valued at $650,000, the lender is assessing a very different lending position from the one that existed when the property was purchased.
The borrower now has considerably more equity in the property, which may allow them to approach the lender about releasing the parent’s guarantee. The lender may require a current valuation, review the outstanding debt and consider whether the loan satisfies its requirements without the additional security before agreeing to the release.
This is also where the often-mentioned 80% loan-to-value ratio, or LVR, becomes relevant. If a property is valued at $700,000 and the outstanding home loan is $560,000, the LVR is 80%. Reaching this level may place some borrowers in a better position to request the release of a family guarantee, but it should not be treated as a universal rule that automatically ends the guarantee.
The lender still needs to assess and approve the release. Its valuation of the property may also differ from an online property estimate or a real estate agent’s appraisal, so borrowers and guarantors should not rely on their own calculation of the property’s equity as confirmation that the guarantee has ended.
How Do You Remove a Guarantor from a Home Loan?
The borrower or guarantor will generally need to contact the lender and ask whether the guarantee can be released. The lender can then assess the current home loan and determine whether it is prepared to continue lending without the additional security.
Depending on the circumstances, the lender may consider the amount still owing, the value of the borrower’s property, the resulting LVR and the history of repayments on the home loan. It may also require a new valuation before deciding whether there is sufficient equity to release the guarantor.
If the lender agrees, there will usually be a formal process to release the guarantee and deal with any associated security. A borrower telling a parent that there is now enough equity in the property is not the same as the lender formally releasing the parent from their obligations, so the guarantor should ensure that the lender’s release process has actually been completed.
This can be particularly relevant where a parent has used their own home as security. If the parent subsequently wants to sell that property, refinance their own mortgage or make other changes to their finances, an existing guarantee and the security supporting it may need to be dealt with first.
There is also a difference between withdrawing before a guarantee becomes effective and trying to end an existing guarantee after the loan has proceeded. The options available at each stage can be different and will depend on the documents and circumstances.
For someone who is already a guarantor and wants to be released, the starting point should therefore be to establish exactly what guarantee remains in place and speak with the lender about its requirements for release rather than assuming that the arrangement has expired.
What if the Lender Will Not Release the Guarantor?
A lender may decide that it is not yet prepared to release the guarantee because there is insufficient equity in the borrower’s property or its other requirements have not been met. A lower-than-expected property valuation can also affect the position, particularly where the borrower was expecting an increase in the property’s value to reduce the LVR.
In that situation, the borrower may need to continue reducing the home loan balance before approaching the lender again. Regular repayments will gradually reduce the amount owing, while additional repayments may allow equity to build more quickly. An increase in the property’s value can also improve the LVR, although the lender may require a new valuation when a future request for release is made.
Refinancing may be another possibility if the borrower has reached a position where they can qualify for a home loan without guarantor support. Someone who needed assistance from their parents when purchasing their first home may have a higher income, lower loan balance and greater equity several years later, potentially allowing them to refinance without using their parent’s property as additional security.
Refinancing involves a new lending application and is not simply an administrative way of deleting the guarantor from the existing loan. The borrower will need to satisfy the new lender’s serviceability and lending requirements, and there may be discharge fees, application costs and other financial considerations involved.
If refinancing proceeds, the existing home loan and guarantee need to be properly discharged as part of the transaction. Applying for a new loan or receiving conditional approval does not itself release the guarantor from the existing guarantee.
The appropriate course will depend on the borrower’s financial circumstances and the lending arrangement. Borrowers considering refinancing should discuss the lending and financial implications with an appropriately qualified professional before proceeding.
How Long Does a Guarantor Stay on a Home Loan?
There is no standard period after which a guarantor automatically comes off a home loan. A guarantee does not necessarily expire after two years, five years or any other predetermined period simply because the borrower has continued making repayments.
The duration of the guarantee can depend on the amount originally borrowed, the amount covered by the guarantee, the rate at which the borrower reduces the loan, changes in the property’s value and the lender’s requirements for releasing the additional security.
A guarantor can potentially be released well before the borrower has repaid the entire mortgage. The borrower might still have 15 or 20 years remaining on their home loan when the lender determines that the additional security is no longer required. In that situation, the borrower continues with the home loan while the guarantor is formally released.
The reverse can also occur. A parent may have expected the guarantee to last only a few years but find that the lender still requires the security because the loan balance has not reduced as quickly as anticipated or the property’s value has not increased.
Changing your mind about being a guarantor is also different from being formally released. Once the loan has proceeded and the guarantee is in place, the guarantor has entered into a legal commitment. Wanting to end that commitment does not necessarily give the guarantor the right to cancel it immediately, and the terms of the guarantee need to be considered.
For this reason, anyone considering becoming a guarantor should ask about the likely pathway to release before signing. It is worth understanding the amount being guaranteed, whether the guarantee is limited, what security is being provided and what the lender may require before it will consider releasing that security.
ASIC’s Moneysmart guidance recommends that prospective guarantors confirm the exact amount they are guaranteeing, when that amount may reduce and when the guarantee can end. Moneysmart’s guidance on going guarantor also explains some of the broader financial risks that should be considered before agreeing to guarantee another person’s loan.
What Happens Until the Guarantor Is Formally Released?
Until the lender has formally released the guarantee, the guarantor may remain responsible under the terms of the documents they signed. This is particularly important if the borrower experiences financial difficulty while the guarantor is waiting for a release to be approved.
A guarantee is more than an indication that you support somebody else’s home loan application. It creates legal obligations to the lender, and those obligations can become significant if the borrower stops making repayments.
The extent of the guarantor’s exposure depends on the guarantee. Some family guarantee arrangements limit the guarantee to a specified amount rather than making the guarantor responsible for the entire home loan. A limited guarantee can restrict the amount covered, but it does not remove the financial risk associated with the amount that has been guaranteed.
Where the guarantor has provided their home or another asset as security, the consequences can be more serious. ASIC’s Moneysmart guidance explains that a guarantor may have to repay the guaranteed debt if the borrower cannot and that an asset used as security can be at risk if the debt cannot be paid.
There can therefore be a period where the borrower believes they have enough equity to remove the guarantee but the lender has not yet completed its assessment or formal release. The guarantor should continue to treat the guarantee as being in place during that period.
This becomes particularly important if the borrower defaults before the release is completed. Our article Guarantor Risk When a Home Loan Defaults explains what can happen if a borrower stops meeting their home loan obligations and how this can affect the person who provided the guarantee.
Consider the End of the Guarantee Before You Sign
The possibility of eventually being released from a guarantee may seem like something to worry about later, but it is worth considering before agreeing to become a guarantor in the first place.
Parents often provide guarantees because they want to help their children enter the property market, particularly where saving a sufficient deposit has become difficult. A family guarantee can help achieve that goal, but the parent’s own financial plans should also be considered.
A parent may intend to sell their home and downsize in several years, refinance their own mortgage, retire or use their equity for another purpose. They may also want to help another child purchase a property in the future. An existing guarantee and any security connected with it may affect those plans.
Our article Parent Guarantor Queensland: Help Your Children Buy Property looks more closely at how parents can assist their children through a home loan guarantee and some of the issues families should consider before proceeding.
Before signing a guarantee, you should understand how much you are guaranteeing, whether your liability is limited, what property is being used as security and what could happen if the borrower cannot meet their repayments. You should also understand what the documents say about the duration of the guarantee and the circumstances in which your obligations may eventually end.
Thinking about these issues at the beginning of the arrangement can provide a much clearer picture of the commitment you are making and how it may affect your own finances in the years ahead.
Independent Legal Advice for Home Loan Guarantors
Bush to Beach Legal provides independent guarantor legal advice for people who have been asked to guarantee a home loan.
We review the relevant loan and guarantee documents and explain your obligations and potential risks in plain English before you sign. This includes helping you understand the amount covered by the guarantee, the security you are providing, what could happen if the borrower defaults and any provisions in the documents relevant to the duration or ending of the guarantee.
Our guarantor advice appointments are available online for clients throughout Queensland, including the Sunshine Coast, Brisbane, Gold Coast, Ipswich, Logan, Toowoomba, Cairns and surrounding areas. If your lender requires an Independent Legal Advice Certificate or solicitor’s certificate as part of the guarantee process, we can complete the required documentation once the legal advice requirements have been satisfied.
If you have been asked to become a guarantor for a family member’s home loan, contact Bush to Beach Legal to arrange an independent guarantor advice appointment.
Disclaimer: This article provides general information only and does not constitute legal advice. Property contracts and special conditions can vary, and your rights and obligations will depend on the terms of your contract and your individual circumstances. You should obtain legal advice about your specific situation before signing a contract or taking action in relation to a property transaction.
