What You Need To Know About Guarantor Loans

Breaking into the property market has become more difficult than ever – but could a guarantor loan be the option you’ve been looking for?

A guarantor loan works like any other home loan, only with an added guarantee from a third party that the loan will be repaid. In the event that the borrowers cannot repay the loan, the third party may be then liable.

Here are the things you need to know to help determine whether a guarantor home loan could be right for you:

Who can act as the guarantor?

In most cases, only parents of the borrower may act as guarantor. However, some banks are becoming more relaxed on this rule and are now accepting guarantees from other immediate family members such as grandparents and siblings.

Generally, the guarantor will need to be an Australian or New Zealand citizen and must either be gainfully employed or a self-funded retiree. The guarantor must also be able to prove they have sufficient equity in their home for the bank to be able to recover their costs should any issues arise.

What are the benefits?

Essentially, a having a guarantor on a home loan provides the bank with added security, which in turn increases borrowing power and strengthen a loan application.

Having a guarantor listed on a home loan also eliminates the requirement for Lenders Mortgage Insurance (LMI), which is generally applied to loans of more than 80% of a home’s value. This alone can save the borrower tens of thousands of dollars!

What are the risks?

Throughout the duration of the guarantor loan, the guarantor’s borrowing ability could be reduced, which may impact their own future financial plans.

Should the borrower be unable to me their repayment requirements, the bank may choose to sell the property. Whatever amount is still owed, the guarantor will then be liable for. If the guarantor is then unable to repay the remaining amount, the bank has the power to then repossess the guarantor’s own home in order to retrieve the full amount.

Is the full amount guaranteed?

It’s important to be aware that in many cases guarantors will not need to guarantee the full amount of the loan. If the borrower has deposit they can put towards the house the guarantor may only need to provide security on a certain percentage for the loan application to succeed.

Furthermore, the guarantee does not need to remain in place for the full duration of the loan. Usually, the guarantee can be removed after 5 years or when the borrowers have reduced the loan to 90% of the property value.

Please be aware that this is general advice only. For more information specific to your individual financial circumstances, speak to a trusted financial professional and make sure to consider all of your options before making any final decisions.