Should you use a guarantor for your home loan? Before making your decision, be sure to consider the pros and cons for all concerned parties.
Guarantor loans are often employed by first home buyers trying to crack the market. If you can’t quite get the savings you need for that 20% deposit, using a guarantor could be a way to get your loan across the line.
So, what is a guarantor and how does it affect your home loan?
“A family guarantor loan is when a person – usually a trusted family member – agrees to follow through on your loan if you default or are unable to pay, using the equity in their own property as security for your loan,” ING Mortgages Manager William Kiln explains.
But is it as great and simple as it sounds? Here’s what you need to know.
How does it work?
To put it simply, a guarantor agrees to be responsible for your loan if you default or are unable to pay. This doesn’t mean you’re relieved of making repayments. In fact, you should aim to service your loan as usual with the goal that your guarantor never be called upon.
However, if it reaches the point where you are unable to pay off your debts, the guarantor’s assets will be put on the line to ensure the lender receives their money back.
Using a guarantor can help you secure a deposit on a loan you may not have been able to based on your personal financial situation alone.
For instance, lenders typically require applicants to have a 10 to 20% deposit before approving a home loan. Using a guarantor means you may be approved for a loan with only a five or 10% deposit.
You may also be eligible for a much better deal than if you’d gone in alone. In short: it can help reduce the financial stress of those early stages of buying a home.
“With a family guarantee, you may not need as much of a deposit and you don’t have to pay lenders mortgage insurance,” William confirms.
In summary, you won’t have to save as much and you might be looking at getting a better home much faster than if you had to save up for it all on your own.
The main con is the risk for the guarantor – the person guaranteeing that you will pay back your loan. If you fail to do so, they will be held accountable, putting their own financial security in jeopardy.
Therefore, it’s vital the guarantor is aware of the risk involved, and is willing and able to meet it if required.
“It’s wise for your family member [the guarantor] to seek independent legal advice before agreeing to pay off your loan,” William advises.
The relationship between the loan applicant and the guarantor should also be in tip top shape when it comes to trust and reliability.
It is also important to understand that borrowing 95% of the property value may mean that your repayments are quite high – and you’ll need to ensure that you’re able to afford these payments ongoing. This means you need to be certain that you can pay back what you borrow down the track, or risk the consequences for your guarantor.
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