Guarantor loans are quite common these days but many guarantors may not know what the actual responsibilities of a guarantor are.
What is the role of the guarantor?
A guarantor is someone who provides a guarantee for their children or family members to get a home loan by securing their own property.
Diving in to support someone else’s mortgage agreement can put a lot of risk and exposure to on your assets. So, it is important that the borrower and guarantor carefully consider whether a guarantee arrangement would be suitable for them.
Things to consider before agreeing to be a guarantor
Before you decide to guarantee a loan, you must understand the following points:
- What is the financial status of the borrower?
- What is your own financial position?
- Can you afford to cover repayment amounts if the borrower defaults on loan repayment?
- For how long will the borrower need to continue to make loan repayments?
- Have you read the loan contract?
- Do you understand what amount is to be repaid (including interest rate, fees and charges and the instalment amounts)?
- Are you being asked to put up any assets as security for the borrower’s loan?
- What restrictions apply, if you decide in the future to sell your property that you have used as a security for the borrower’s home loan?
- Will you be guaranteeing the entire loan amount or just a portion of it and for how many years?
- Have you obtained independent legal and financial advice before becoming a guarantor?
How is a guarantor home loan structured?
A guarantor is the only loan type that allows you to borrow 100% of the property price even if you haven’t saved a deposit.
In a guarantor loan, the lenders use both the property you’re buying and the guarantor’s property as security for the loan.
The guarantor can also choose to limit the guarantee, which means they can only secure a part of the loan.
The banks assume that the value of the guarantee reduces your loan to under 80% of the property value. This is why the requirement to pay Lenders Mortgage Insurance (LMI) is waived by the lenders.
Our mortgage brokers specialise in guarantor loans. Call one of them on 1300 889 743 or fill in our free online assessment form and find out how you can be a guarantor yourself.
What risks are involved?
The guarantor is ultimately liable for the part of the loan they have guaranteed.
If the person they have guaranteed fails to meet their loan obligations and defaults, the guarantor will be responsible for the amount they have guaranteed.
This can put them at a great risk depending on the amount of assets or exposure they have on the mortgage.
What will the guarantor be liable for?
The guarantors are usually parents helping their adult child buy a home or a close family member who knows the borrower.
On paper, a guarantor’s responsibilities are quite significant since they would ultimately be responsible for paying off your mortgage in the event that you default.
Can I limit the size of the guarantee?
The guarantor can choose to limit the size of the guarantee using a limited guarantee. This means that you’re only liable for up to an amount agreed upon by you and the lender.
For instance, if the size of the loan is $500,000 and your limited guarantee is for only $150,000 then you’re only liable to cover up to $150,000, which is the agreed amount.
Of course, if the property is sold for $500,000, you won’t have to worry about anything. However, if the property is sold for $300,000, you’ll only be liable for the limited guarantee of $150,000 and not for the remaining $50,000.
On the other hand, if it sells for $400,000 then you’ll only be liable for $100,000, not the entire amount that was guaranteed.
You can call us on 1300 889 743 or fill in our free online assessment form to speak with our mortgage brokers for more information on a guarantor’s responsibilities.
What if I can’t cover the guaranteed amount?
If you can’t cover the outstanding debt with your equity or don’t have enough savings to cover the amount, then you might want to consider getting:
- A second mortgage
- A personal loan
Usually, banks will do everything they can to avoid selling the guarantor’s home. For example, they can lower your repayments until you’re able to make full payments.
If every option has been exhausted, then they’ll have no choice but to sell your home. However, they will only take the amount required to cover the home loan up to your limited guarantee.
The remaining proceeds will go back to you.
It’s recommended that you don’t enter into a guarantor arrangement if you have concerns about the borrower’s responsibility or financial situation.
Responsibilities of a guarantor FAQs
What if the guarantors have another mortgage?
This shouldn’t be a problem considering that some of our lenders can still secure a guarantee on the guarantor’s property, provided that they have sufficient equity.
Lenders normally use a second mortgage to do this.
However, lenders will only consider this if the total debt secured on the guarantor’s property is less than 80% of the value of their property.
For instance, your guarantor has a mortgage with $150,000 owing and they need to give a limited guarantee of $100,000. The total debt secured on their property will be $250,000.
To be eligible for a guarantor loan, their property needs to be worth at least $312,500.
You can use our Guarantor Loan Calculator to help you work out how much equity you have in your property.
When can the guarantee be removed?
Generally, you can release the guarantee when LVR is down at 80% or less or if the property has increased in value.
Removing the guarantee is relatively easy and may sometimes only require you to sign a form.
Removing the guarantee early can help the guarantor rest at ease. For a detailed explanation on this topic, please check our removing the guarantee page.
Do I have to pay fees while removing a guarantee?
You may be liable for some minor administration and government fees, depending on the lender you apply with.
An LMI premium may be added if your home loan exceeds 80% of the property value. This is because the banks consider your mortgage to be riskier because you don’t have additional security.
Get legal advice from a professional
Being a guarantor for someone else’s loan is an important responsibility.
It’s recommended that you seek advice from both a legal and financial professional such as financial adviser or your solicitor before you decide to proceed.
Our mortgage brokers are experts at handling guarantor loans. You can call us on 1300 889 743 or complete our free online assessment form to find out how we can help you.