When purchasing a property you will most likely need to take out a home loan to cover the costs. However, if you are struggling to reach your target deposit, but are able to make the required home loan repayments, you could use a guarantor to help you find the remaining funds to purchase a property.
What is a Guarantor?
A guarantor is someone who becomes responsible for paying off the home loan if you (the borrower) can no longer repay this loan. They can help you get a home loan by pledging their own assets, such as their own home. A guarantor tends to be immediate family members, such as your parents or sometimes siblings and grandparents, as well as your spouse.
Benefits of having a Guarantor
There are many benefits to use a guarantor. These include: 1) Allows you to buy your own property sooner
If you are struggling to save for a deposit, the help of a guarantor will allow you to reach this deposit goal sooner, enabling you to get a foothold on the property ladder now, rather than in a year’s time for instance. 2) Can avoid paying Lenders Mortgage Insurance (LMI)
If you are applying for a home loan but have less than 20% deposit then you will be required to pay LMI. This is because the lender sees you as higher risk. By having a guarantor you could save thousands of dollars. 3) Can borrow up to 100% of the purchase price and even associated costs like stamp duty.
4) Guarantors don’t have to provide a guarantee to cover 100% of the loan – they can choose the amount they wish to cover.
Depending on the lender’s policies, a guarantee can range from as low as 20% right up to 100% of the purchase price.
What does the guarantee involve?
When someone becomes a guarantor they have signed up to allow the equity within their own property to be used as extra security for your home loan. The lender will take out a mortgage over your guarantor’s property and use your property as the primary security for the loan. You will need to make the monthly repayments from your own income as the mortgage does not support the loan. It only supports the guarantee made from the guarantor.
How long do I need a guarantor for?
You could choose to have a guarantor for the entire time you own the property. However, if your property has built up equity, then a guarantor can ask to be released from the loan. Bear in mind though that some lenders will require you to pay additional fees to release your guarantor. The guarantee can be released even if the loan has not yet been repaid in full.
Important things to note when asked to be a guarantor
If you are asked to be a guarantor then it is important that you are not hasty and think carefully about this decision as it could impact you significantly if things go belly up and the borrower is unable to pay the loan. Some of the things you should note include:
- As a guarantor your ability to borrow will be reduced.
- A guarantor will be liable for the amount specified in the guarantee if you, the borrower become unable to repay the loan.
- Legal action can be taken against you and your guarantor from your lender if you cannot pay back the loan.
- Legal and financial advice should be sought before signing up to be a guarantor.
Published on 19th of February 2015 by Marty Stanowich