We answer some of the more commonly asked guarantor questions to help you decide whether going guarantor on your child's loan is the right move for you.
Q: How does a guarantor loan work?
A: A guarantor allows the equity in their property to be used as additional security for a person’s loan.
Q: What are the pros and cons of guarantor loans?
A: First home buyers don’t have to save the huge deposit needed to buy their first property because their guarantor is using the equity in their home as additional security for the first home buyer’s loan.
Of course, going guarantor is not without risk. If the first home buyer defaults on their home loan, the guarantor becomes responsible for paying their debt.
Q: What safeguards should I have in place to protect or recoup my investment?
A: If you decide to guarantee a home loan, it’s essential you speak with a qualified mortgage broker and a solicitor to protect both parties. A contract can be drawn that clearly explains how the loan will be structured and what happens in the event that the borrower defaults on their loan.
Q: Does going guarantor mean my child will not need to prove savings?
A: While going guarantor means your child can borrow 100% of the purchase price, some lenders may still require evidence of genuine savings. Essentially, this is money your child has saved themselves for more than three months.
Q: How does going guarantor compare to other financial benefits such as gifting children money?
A: The biggest difference between going guarantor on a loan and gifting a child money is that no money changes hands in a guarantor loan. The guarantor does not have to save a lump sum, or put money away for a child inheritance. Rather, they can help their child today by using the equity in their property.
Q: With house prices being so high, will guarantor loans become the new norm?
A: At Mortgage Choice, we have definitely seen an increase in the proportion of parents going guarantor on their children's loans.
Anything that can be done - by parents or the state and federal government - to help first home buyers should be applauded and welcomed.
Q: What do I do if I feel pressured into helping out my adult child in buying a home?
A: If your child has asked you to guarantee their home loan, there’s no reason why you should feel pressured to do so.
While you may want to help your children achieve their property ownership goals, it’s important to note that there are risks associated with going guarantor and, as such, no-one should jump into the situation before giving considered thought.
If you’re thinking of going guarantor on a home loan, it’s critical you speak to both a legal and mortgage professional.