For many first home buyers, having a guarantor can make it easier to secure loan approval.
High property prices can make it hard to save a reasonable deposit on a first home. That's where guarantors can play a valuable role.
A guarantor is quite different from a co-borrower. Guarantors allow the equity in their own property to be used as additional security for the borrower's loan. This can help a first home buyer avoid the cost of lenders mortgage insurance - especially if their purchase deposit is less than 20 per cent of their preferred property's value.
Who can be a guarantor?
Guarantors are generally limited to immediate family members. Normally, this would be a parent but guarantors can include siblings and grandparents, and some lenders will allow extended family members and even ex-spouses to be a guarantor though this varies between lenders.
The guarantor doesn't normally make repayments on the loan but if you, the borrower, cannot keep up with the loan, the lender will turn to the guarantor to either take over repayments or pay off the loan altogether. This leaves guarantors facing a significant responsibility however it should be noted that the amount of the guarantee will depend on the policy of the lender.
The guarantee can vary from the full loan amount to as little as 20% of the loan. And once the borrower has built up equity in their property, the guarantor can ask to be released from the loan.
Seek legal advice
Agreeing to act as guarantor is a significant step, and anyone considering being a guarantor for a property loan is advised to seek independent legal and financial advice before accepting the role. In fact, most lenders will insist on this, prior to accepting a guarantee.
It is important to note that a guarantor's ability to take out a loan themselves can be impacted if they agree to be a guarantor.