Removing a Guarantor from Your Mortgage

For many New Zealand first home buyers, getting onto the property ladder required help from family. Guarantor mortgages, where a parent or family member uses their property as additional security, have become increasingly common as house prices have outpaced deposit savings. It is a generous gift that carries real risk for the guarantor.

But guarantees are not meant to last forever. As you build equity and establish your financial position, removing the guarantee becomes both possible and important. This article explains when and how to release your guarantor from their obligation.

Understanding the Guarantor's Position

Before diving into the removal process, it is worth understanding what your guarantor is actually on the hook for. When someone guarantees your mortgage, they are promising the bank that if you cannot pay, they will. This is not a vague commitment; it is a legal obligation backed by security over their own property.

While the guarantee is in place, your guarantor faces several impacts on their own financial life:

• Limited borrowing capacity: The guaranteed amount reduces what they can borrow for their own purposes.
• Risk to their home: In a worst-case scenario where you default and your property does not cover the debt, their property could be at risk.
• Credit implications: The guarantee appears on their credit file and affects their financial profile.
• Stress and worry: Many guarantors carry anxiety about the commitment, particularly if your financial situation changes.

When Can You Remove a Guarantor?

The core requirement for releasing a guarantor is straightforward: you need to demonstrate that you can support the mortgage on your own, without the additional security they provide. In practice, this usually means:

Sufficient equity: Most banks want to see you have at least 20% equity in your property before they will release a guarantor. This is the standard threshold where Loan to Value Ratio (LVR) restrictions ease and banks are comfortable with your property alone as security.

Serviceability: Your income and expenses must demonstrate you can comfortably afford the mortgage repayments. If your financial situation has worsened since you took out the loan, the bank may be reluctant to release the guarantee even if you have equity.

Clean payment history: A track record of on-time payments shows the bank you are a reliable borrower who does not actually need the backup of a guarantor.

The Removal Process

Releasing a guarantor is not automatic; you need to actively request it and go through a formal process. Here is what to expect:

The entire process typically takes several weeks, depending on your bank's processing times and whether any complications arise. There may be fees involved, including valuation costs and potentially legal fees for the guarantee release documentation.

What If You Do Not Quite Have 20% Equity?

If you are close to 20% equity but not quite there, you have a few options to consider:

Make a lump sum payment: If you have savings, using them to reduce your loan balance might push you over the threshold. This costs you money, but frees your guarantor sooner.

Wait for property values to rise: If the market is moving in your favour, patience might get you there. However, markets are unpredictable, and waiting is not guaranteed to work.

Pay a low equity margin: Some banks will release guarantors if you are willing to pay a Low Equity Margin (LEM) on your mortgage. This is an interest rate premium charged when your LVR exceeds 80%. The cost can be significant, so run the numbers carefully.

Refinance to a different lender: Some lenders have different policies around guarantor release or LVR thresholds. A mortgage adviser can help you explore whether another bank might offer better terms for your situation.

Communicating with Your Guarantor

Throughout this process, keep your guarantor informed. They have a vested interest in being released from the guarantee and deserve to know the timeline and any obstacles. If your bank requires additional information or the process is delayed, let them know.

Once the guarantee is released, make sure your guarantor receives confirmation documentation. They should also check that the guarantee has been removed from their credit file and that any caveats or mortgages over their property have been discharged.

Proactive Steps to Accelerate the Process

If removing your guarantor is a priority, there are things you can do to speed up the timeline:

• Make extra repayments: Every dollar you pay above your minimum reduces your principal faster. Even small additional payments add up over time.
• Review your loan structure: If you have a floating or revolving credit portion, you can make unlimited extra payments without penalty.
• Avoid extending your loan: While lower payments might be tempting, they slow your equity building.
• Maintain the property: Improvements and maintenance support property values, which affects your equity calculation.

What If Your Bank Says No?

If your bank declines to release the guarantor, ask for specific reasons. Understanding why helps you address the issues. Common reasons include insufficient equity, concerns about your income stability, or poor payment history.

If you disagree with the decision, you can escalate through the bank's complaints process. Alternatively, a mortgage adviser may be able to help you refinance to another lender with different policies. Sometimes a fresh perspective on your application makes all the difference.

Remember, removing a guarantor is not just about your independence; it is about doing right by the family member who helped you when you needed it most. Make it a priority and work actively towards that goal.