Your child is a grown-up now and wants to buy a home. Can you help?
Yes, you can.
Being a guarantor is one of the most popular ways of supporting their dream of buying a home in Australia. Every year, as much as 50% of first home buyers are helped by their parents by being a guarantor on their home loan.
If your son or daughter has asked you to be a guarantor, then here are the things you need to consider before agreeing:
Can I afford being a guarantor?
Have an overview of your financial position. It is a good idea to wait until you’re entirely debt-free before agreeing to be a guarantor. The most preferred situation would be to have full equity in your home and have a stable income. This is because you will need to make the home loan repayments you guarantee if your son or daughter fails to do so.
Your plans in the next few years should not involve any significant financial expense. Suppose you have a plan to buy a new home or use your equity in your home for any purpose in the next couple of years. In that case, it may become difficult for you to do so if you’re an existing guarantor.
How much do I need to guarantee?
You can guarantee the full loan amount. However, we recommend you to limit the guarantee secured on your property. In this way, you’re not liable for the entire loan amount, only a portion of it.
Usually, when limiting the guarantee, lenders will require at least the amount needed to keep the loan at 80% of the property price. This will mean 20%-30% of the property price that you’ll be guaranteeing, which will include stamp duty and other costs of purchasing a home.
How long do I have to stay on the mortgage?
Many guarantees are put in place because the borrower cannot put together the required deposit. Removing the guarantee depends on how much the property appreciates in value and how many extra repayments the borrower can afford to make. Most people are able to remove the guarantee 2 to 5 years after they initially set up the loan.
The borrower, in this case, your son or daughter, should apply for the removal of the guarantee upon meeting the following conditions:
They can make repayments without any assistance.
Their loan is for less than 80% of the property value.
They have not missed any payments in the last six months.
Can I withdraw from being a guarantor?
There are only a couple of ways of withdrawing from being a guarantor. Once the agreement is signed, there is a 14-day cooling-off period. If you want to withdraw, this may be the best opportunity. Otherwise, you will have to stay as a guarantor until the borrower removes the guarantee.
The only other way is to close the loan in its entirety by paying it off in full. Both you or the main borrower could do this. However, it may not be a possible option for you. That is why you need to make sure you have a strong relationship with the borrower before you agree to be a guarantor for their home loan.
Can I sell my home before the guarantee is removed?
Yes, you can sell your home and transfer a portion of the proceeds to a term deposit temporarily. However, if the outstanding loan is more than 80% of the property value, the lender may not readily release the property.
Selling a home before removing the guarantee could be a messy affair. That’s why you should get in touch with us before you put your home on the market. Give us a call at 1300 889 743 or complete our free online assessment form, and we can discuss what is right for you.
Does being a guarantor affect my credit score?
Let’s say the borrower stops making repayments and starts defaulting. You will be called upon, but only a last resort. Most guarantor loans will have several measures and precautions to collect from the main borrower first. This will include emails, letters and phone calls; all spread out within a reasonable period of time.
If it comes down to you being called upon to make an outstanding payment as the guarantor, you will have some flexibility. You could always try to arrange with the lender to make smaller monthly payments. Lenders are usually lenient towards guarantors, which should avoid impacting your credit rating.
However, should you fail to make repayments after making these arrangements, it will affect your credit score negatively.
Where do I contact to discuss my specific details?
For any legal advice, we highly recommend you get in touch with a trusted solicitor. They will help you understand the full implications of the guarantee and advise you accordingly.
To discuss any more details about the guarantor loan, you can call us on 1300 889 743 or complete our free online assessment form and find out if being a guarantor is right for you.