What is a guarantor?
A guarantor is someone who helps you with your home loan, often a parent. The benefit of using a guarantor is you can avoid Lenders Mortgage Insurance (LMI) and lenders are usually more willing to lend you the money. A guarantor does not need to be on your loan for the life of the loan, but they can help you get your foot in the door.
You will still need to be able to service the home loan on your own before a bank will lend to you. The repayments are your responsibility and lenders have various requirements for borrowers using a guarantor.
How does it work?
A guarantor puts up the equity in their own home to be used as security against your home loan. Often a parent uses the equity in the family home to help their child purchase their first home and get them into the property market. The equity in the guarantor home is extra security for your lender thereby increasing the loan to value ratio (LVR). The property you are buying will be the main security for the loan, however, the lender will also place a mortgage on the home of the guarantor.
Who can be a guarantor?
Most lenders limit a guarantor to being immediate family, such as parents, grandparents or siblings. Some lenders will allow other close relatives such as an ex-spouse. It varies from lender to lender though.
How does being a guarantor impact them?
As a guarantor, they are liable for the repayments of your home should you default. Your guarantor will be liable for the total amount specified in the guarantee. Due to the risks involved, it is essential that everyone involved get proper legal and financial advice before moving ahead with this option. In fact, most lenders will insist your guarantor has sought this advice before they will allow them to be a guarantor for you.
When do they stop being a guarantor?
A guarantor no longer needs to be linked to your loan once you have paid off the amount they guaranteed, which will vary depending on your loan. This means, they and their home are no longer liable for any part of your home loan. You may be required to pay fees to your lender to have the guarantor removed. Check with your lender to see what is required.
If you are thinking about using a guarantor to get into the property market sooner, chat to one of our brokers to find out your options, how much you can borrow and which lender would be right for you.
Disclaimer:
This article is written to provide a summary and general overview of the subject matter covered for your information only. Every effort has been made to ensure the information in the article is current, accurate and reliable. This article has been prepared without taking into account your objectives, personal circumstances, financial situation or needs. You should consider whether it is appropriate for your circumstances. You should seek your own independent legal, financial and taxation advice before acting or relying on any of the content contained in the articles and review any relevant Product Disclosure Statement (PDS), Terms and Conditions (T&C) or Financial Services Guide (FSG).
Please consult your financial advisor, solicitor or accountant before acting on information contained in this publication.
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