You may have been recently thinking about how much your property is worth on the…
Getting into the Australian property market these days can prove to be very difficult. Not only are housing prices sky high, but they need a hefty deposit to secure them. Having a guarantor get you over the 20% line may be an option. But before you decide to have a guarantor or be one, it is important to understand the finer details and risks, as well as seek the right advice.
So, how does a guarantor work? Are there any risks of going guarantor on a home loan? Let’s break it down.
What exactly is a guarantor?
A guarantor on a home loan is an individual who provides extra security for your mortgage. The guarantor doesn’t need to hand over any money but instead gives the equity in their home as security. Most lenders will expect a guarantor to be a close relative or, in some cases, an ex-spouse. Having a guarantor can help a first home buyer own a property sooner and also avoid the dreaded Lender’s Mortgage Insurance (LMI), which is often the savings of thousands of dollars.
How does a guarantor mortgage work, and does having a guarantor increase borrowing power?
You may have your eye on a property that is $650,000, and you have managed to pull together a deposit of $65,000, which is 10% of the overall value of the house. Having a deposit under 20% will mean you are now set to pay LMI unless you can come up with the extra 10% (that would be a total of $130,000 in cash deposit needed).
You could choose to wait and save the deposit money of $130,000 to secure the loan and waive the LMI, or you could use a guarantor, who will offer $65,000 of their home equity as additional security for your home loan. This way, you will have your 20% deposit and avoid the Lenders Mortgage Insurance.
What are the risks of a guarantor home loan?
While your guarantor does not need to make any payments on your home loan, the lender will turn to them if you can no longer keep up your mortgage repayments. The risks of a guarantor home loan weigh heavily on the guarantor.
If you are the one thinking about being a guarantor for someone else’s loan, you would need to take it as seriously as though you were applying for a home loan yourself.
If the borrower can not repay the mortgage, the lender will turn to you as guarantor to pay back the entire home loan with interest included. If this is not possible, then whatever was used as security for the loan may be repossessed. This means if you used the equity in your home as security and payments are not being met, and then there is a possibility that you may lose your home. This will also be listed on your credit report, making it harder to borrow in the future.
Being a guarantor can also have the potential to change a relationship, especially if repayments are not being met. Financial stress is a very easy way to damage a relationship quickly.
Increasingly, there may be a need to seek assistance when buying property. It is important that all avenues have been exhausted before seeking advice around this strategy. For example, the Australian government has offered first home buyers the guarantee to offset lenders mortgage insurance costs. As there are levels of complexity and risks, the importance of advice is essential in understanding all options involving family as guarantors.
Nestor Ramirez, Senior Mortgage Broker, Watson Mortgages.
Even if things don’t turn out so bleak going guarantor on a home loan, you will still need to be aware that if you want to apply for a loan in the future, you will need to tell the lender that you are a guarantor on another loan, which may deter them from lending to you.
It is important to realise that a guarantor is not a quick fix to getting into the property market. It is quite a serious decision to make with your loved ones and needs to be entered into with extreme caution and care.
Assess your options and take care before going guarantor on a home loan
If being a a guarantor on a loan or asking someone to guarantee your loan seems like an uncomfortable risk to take, there are other options. Perhaps money could be contributed towards the home deposit instead, or maybe even living arrangements agreed upon to help a deposit be saved. Whatever you decide, get some advice before you make the big decisions, and understand that relationships are precious. Any financial decision that affects a close relationship must be entered into with caution and information.
If you are going guarantor on a home loan, it is important to remember to treat the guaranteed loan as your own home loan. Before you sign the guarantee, be sure to obtain a copy of the loan contract from the lender. Do not sign away your home equity before you know every detail of the loan agreement, including the loan term and amount.
Speak with your mortgage broker to ensure that you would be in a situation to be able to meet loan repayments in the event that the borrower could not make them.
Calculate what you would need to pay back, including the full amount of the loan with any fees and charges, and of course, interest.
Understand exactly how much you have guaranteed the loan for. If it is for the total loan amount, then you will be responsible for the full amount, including interest. Consider guaranteeing a fixed amount so that you are aware of exactly how much you would need to pay if necessary.
Get the right advice
It is always a good idea to have the right advice and information when it involves people you care about. Being informed of your options and equipped with information can give you peace of mind that is invaluable. Call Watson Mortgages on 02 4038 1623 to make an appointment with one of our experienced Mortgage Brokers today.
Disclaimer: The information provided in this fact sheet is not legal, taxation or financial planning advice. It has been prepared without considering your specific needs, objectives and personal financial situation. Before acting on this information, we recommend that you consider carefully if it is appropriate for your needs, objectives and personal financial situation. All loan products are subject to lender criteria and approval. Fees, terms and conditions apply. Your full financial needs and requirements need to be assessed prior to any offer or acceptance of a loan product. Licensing Statement: Watson Mortgages Pty Ltd Credit Representative 525053 is authorised under Australian Credit Licence 389328.