For many Aussies, obtaining a loan can sometimes be a challenging task, especially for first home buyers starting out on the property ladder. With much of the nation’s wealth held up in real estate, guarantor loans continue to be a very popular avenue for borrowers - in fact, guarantor loans more than doubled in 2023, compared to jumping from 1.8% to 5%*. Another 2023 study by mortgage brokers revealed an increase of 71% in guarantor loans over the past six years, making the "Bank of Mum and Dad" the 9th largest lender in the country, financing approximately $35 billion worth of loans*. The increase in guarantor loans reflects a broader shift in the borrowing habits of Australians, as individuals seek out innovative solutions to meet their financial needs. With housing prices remaining high and the cost of living continuing to rise, guarantor loans provide a lifeline for many Australians striving to achieve their financial goals. Understanding Guarantor Loans So, what is a guarantor loan exactly? In a guarantor loan arrangement, the borrower applies for a loan with the support of a guarantor. The lender assesses both the borrower's and the guarantor's financial circumstances to determine the risk involved. Chris Brown, Mortgage Broker and owner of CMB Finance explains. “Guarantor loans essentially involve a third party - typically the parents, pledging their equity as security for the borrower's loan.” “A guarantor loan can have a number of benefits from increasing your borrowing ability, increasing your deposit in order to eliminate lenders mortgage insurance or helping with additional costs associated with buying a property.” “Lender’s mortgage insurance alone can cost borrowers thousands or even tens of thousands of dollars, which is why it’s a cost many borrowers do their best to avoid. And when you add in other home buying costs like stamp duty, conveyancer fees as well as home insurance, purchasing a first home is not easy.” Risks with guarantor loans Although having a parent or family member as a guarantor is great for young borrowers, it can be risky for the guarantor. When a guarantor loan is approved, the borrower receives the loan, and the guarantor assumes the responsibility to make repayments if the borrower defaults – therefore it’s crucial for both parties to understand the terms and obligations outlined in the loan agreement before proceeding. Chris Brown continues, “One of the main risks is that if the borrower can’t make the monthly mortgage repayments, the guarantor can be liable for the portion of the home loan they guaranteed.” “If they default on the mortgage, the lender will often sell their home to discharge the mortgage. But if there’s a shortfall – especially if the borrower had negative equity – it may be the guarantor's home on the chopping block next.” “This is a considerable financial risk, so you should think long and hard before agreeing to go guarantor for your kids. Ask yourself honestly whether you trust your children to be financially responsible, and make sure you’re in a position where your savings can comfortably cover any problems that come up.” Showing Savings with guarantor loans Even with a guarantor, some lenders may require you to show that you have been saving money, usually at least 5% of the purchase price. This is known as genuine savings and demonstrates to the lender that you can manage your finances and make regular loan repayments. “Even with a guarantor it is still integral to have a proportion of regular savings usually three months or more”, said Chris Brown. “This provides evidence to the guarantor and the lender that you as the borrower can genuinely pay the loan and are ready for unexpected financial costs - from interest rate rises to cost-of-living pressures and even maintenance of the home. At the end of the day, whilst we all want to help Aussies get that property dream, we also don’t want someone to default on their loan.” Next Steps As you can see, whilst beneficial for borrowers there, are a number of complex and stringent criteria to consider and understand before pursuing a guarantor loan. While they provide a pathway to access credit and improve financial standing, they also entail significant responsibilities and risks for both borrowers and guarantors. Before pursuing a guarantor loan, it's crucial for all parties involved to carefully consider the implications, seek professional legal advice, and ensure they are fully informed about their rights and obligations under the loan agreement. At CMB Finance we have helped many families understand the guarantor loan process. Drop us a line so we can help you today.

One of the main questions we get asked by clients when choosing a home loan is whether they should opt for a fixed or variable interest rate. Like many decisions relating to your mortgage the best loan for you depends on your personal wants, needs and situation. What will work for you will not for the next person. But whether refinancing or taking out a home loan for the first time, a competitive rate could save you thousands of dollars. So should you go fixed, variable, or even a combination of the two? All these options have their advantages and disadvantages – so how do you choose? Let’s get into some of the pros and cons of each. Variable Loans Variable loans are the most popular loan in Australia. Unlike the US and many European countries who offer long term fixed mortgages of up to 30 years, over 70 per cent of home loans across the nation are variable. This is because variable home loans have more flexibility and interest-saving features than fixed home loans. Variable home loans come with a number of features designed to save the borrower money. These can include: 1. Flexibility – When on a variable home loan the borrower has a lot more flexibility with their loan. This can include free, unlimited extra repayments to pay down the principal and more opportunity and less costs involved to pay out the loan or refinance. 2. Offset accounts - Offset accounts are savings accounts that ‘offset’ the loan balance remaining, saving borrowers accruing interest on the equivalent amount of the loan. Most banks will offer an offset account with a variable loan however there are only currently a few that offer any sort of offset account with a fixed rate loan. 3. More facilities – Variable loans offer redraw facilities that let you dip back into extra funds you’ve put towards your home loan. Because variable interest rates can change over time, your interest rate can drop when official interest rates decrease – i.e. when the Reserve Bank of Australia (RBA) cuts the cash rate. This can give you significant potential savings on monthly repayments. On the flip side variable interest rates are susceptible to rate hikes as many of us have experienced over the past 24 months. If the RBA increases the cash rate, mortgage lenders pass these added costs to borrowers. Even a 0.25% rate hike can add a hundreds or thousands dollars to your monthly repayments. Fixed Loans While fixed interest rates don’t make up the majority in Australia, they’re still an important option to consider when comparing mortgages. So, what are their pros and cons? 1. Rate certainty - Fixed interest rates don’t change during the fixed term, typically 1 to 5 years in Australia. This offers certainty for borrowers and will protect them from any rate hikes. Unfortunately, once you are locked into a fixed rate any reductions to interest rates will not be passed on to you the borrower. 2. Budgeting - The main benefit of a fixed loan is greater budgeting certainty. Having a set loan amount to be paid every month provides confidence and can be especially appealing when juggling new homeownership costs. Unfortunately, many of the other features of a variable loan are not included with fixed loans. Interest-saving features such as offset accounts and redraws are extremely rare with fixed rates, in fact only one lender in Australia currently offers a full offset account with a fixed rate. It is also important to note that fixed rates are much more restrictive. Fixed home loans can also be significantly harder to refinance, especially if you want to leave before the fixed term expires. Breaking a fixed-term early usually comes with break costs – and these fees can be steep. Split Loan The third option which many new borrowers are not aware of is called a split rate. A split home loan uses both variable and fixed interest rates to calculate your interest payment. For example, 50% of your loan repayment could be on a fixed rate and the rest would be variable. A split loan can be a great way to get the best of both worlds, especially with fixed rates currently being reduced by many major lenders. This can allow the borrower some confidence in their repayments for now whilst ensuring any future rate reductions are still passed on for the variable portion of the loan. How do I choose? As with all home loan decisions your broker is a specialist who knows the industry inside and out and is there to provide advice on the best solution for you. CMB Finance has access to over 400 loan products and is able to source some of the most attractive loan options in the market to suit your specific needs. Most importantly, we manage the entire loan application process for you from beginning to end taking the hassle away from you and providing you with a friendly, professional experience throughout the entire journey.