Considering becoming a guarantor?
Becoming a guarantor can often help your loved ones realise their property dreams sooner. However, it pays to fully understand the risks and responsibilities before agreeing to take on this role.
How does it work?
As a guarantor, you allow the equity in your own property to be used as additional security for the loan being taken out by your child or relative. The primary security for the loan will be the property being financed, but the lender will also take a mortgage over your property.
This mortgage will not support the loan directly but will be used to support a guarantee from you, as the guarantor.
What are the risks?
While becoming a guarantor can seem like the right thing to do for your loved ones, you need to fully understand the risks involved before signing up.
As a guarantor, you effectively offer to take on responsibility for the home loan if repayments can't be met. So, it pays to consider how you would cope financially if the unexpected happens, and the lender turns to you to make good on the loan. Your own financial wellbeing could be compromised - at worst, you could risk losing your own home.
It is also important to note your own ability to borrow will be reduced after you have agreed to act, so consider carefully your future plans and finance options.
What are the benefits?
The extra security a guarantor provides means the home buyers may be able to secure a home loan with a small deposit - or no deposit at all. It could also mean avoiding Lenders Mortgage Insurance – a saving that can run into thousands of dollars.
The lender will still check the borrower can comfortably manage the loan repayments, but having a guarantor can fast-track them into a place of their own.
Who can be a guarantor?
The role of a guarantor is generally limited to the immediate family members of those seeking finance. Normally, this would be a parent but guarantors can include siblings and grandparents. Some lenders will allow extended family members and even ex-spouses to be a guarantor to a loan, but this varies depending on the lender.
Your local Mortgage Choice broker can help you understand which lender best suits your needs.
What should you consider?
Each lender works differently, but in many cases you can nominate how much of the loan you're prepared to guarantee, and how long you wish to act as guarantor for. When deciding these elements, it's worth making a realistic assessment of the borrower's financial track record and job security, even if you are comfortable that the borrower is well-equipped to manage a home loan.
Often in these situations, emotion may cloud your financial judgement so it is vitally important that you seek independent legal and financial advice before accepting the role - in fact, most lenders will insist on this prior to accepting a guarantee.
How can we help?
As you can see, there's much to weigh up, and it's definitely worth speaking with us about becoming a guarantor. We understand the different requirements of each lender and will cut through the clutter to find the loan that suits your needs, as well as the needs of your loved one.
And, our financial advisers can help you check that this is the right move for you, and make sure that all parties involved have the appropriate insurances in place to protect themselves should the unexpected happen. Talk to us today to find out more about how we can help.
Thinking of 'going guarantor'?
Understanding guarantors guide
Buying a property is one of the biggest financial commitments you’ll make. A guarantor might be the helping hand you need to get into property sooner. We explain in this guide what a guarantor is, who they are, and how you can benefit.
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