February 03, 2016
There are unexpected highs and lows when agreeing to become a guarantor.
High property prices are seeing some first home buyers turn to parents and close relatives to act as a guarantor for their loan. It’s an option that can help them get into their first home sooner – but it also brings considerable responsibilities and risks.
Having a guarantor can offer several benefits for first home buyers. It’s especially useful for borrowers with a small deposit as providing a guarantor can potentially mean avoiding or reducing the cost of Lenders Mortgage Insurance.
However it’s important to realise that as a guarantor, you effectively offer to take on responsibility for the home loan if repayments can’t be met. So it’s not something to take lightly. 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.
Some lenders allow guarantors to impose a limit on the sum they guarantee. And, over time, you may be released from your role as guarantor as the loan is paid down or as the home equity rises.
Even if you are comfortable that the borrower is wellequipped to manage a home loan, it’s still worth making a realistic assessment of their financial track record and job security.
You need to be absolutely clear on the extent of your responsibilities and understand any potential risks you have as a guarantor, I recommend obtaining legal advice before entering into any agreements.