Responsibilities Of A Guarantor

Guarantor loans are quite common, but many people may not fully understand their responsibilities.

While becoming a guarantor can help a family member buy a home, it is important to understand the risks, what you may be required to pay, and how the arrangement could affect your own property and finances before you agree.

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 into supporting someone else’s mortgage agreement can expose your assets to risk. It is important that the borrower and guarantor carefully consider whether a guarantee arrangement i s 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, meaning they can secure only a part of the loan.

The banks assume that the guarantee reduces your loan to below 80% of the property’s value. This is why lenders waive the requirement to pay Lenders Mortgage Insurance (LMI).

Our mortgage brokers specialise in guarantor loans. Call one of them on 1300 889 743 or complete our free online assessment form to find out how you can become a guarantor yourself.

What Are The Risks Of Being A Guarantor?

The guarantor is ultimately liable for the part of the loan they have guaranteed.

If the person they have guaranteed defaults on their loan obligations, the guarantor will be responsible for the amount they have guaranteed.

This can put them at great risk depending on the amount of assets or exposure they have on the mortgage.

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.

Talk To An Expert

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 a financial adviser or your solicitor, before you decide to proceed.

Our mortgage brokers are experienced in guarantor home loans and can explain your options, how much equity you may need, and ways to help limit your risk.

You can call us on 1300 889 743 or complete our free online assessment form to find out how we can help you.