Investing together part 1: The guarantor

The median cost of a house in one of Australia’s five biggest cities exceeds $800,000, according to CoreLogic RP Data. Small wonder then that your average first and second home buyer might struggle to get approved for the loan necessary to buy in such an expensive market.

Could having a guarantor for your loan be the key to solving this problem? Perhaps. But there are several things to consider before you, or your potential guarantor make any commitments.

What is a guarantor?

If your lender won’t approve a home loan they may ask for a guarantee. Someone close to you (usually parents) will sign on the dotted line for you and become the ‘guarantor’ of your loan. Money Smart states that if you sign on as someone’s guarantor your are responsible for all of their mortgage repayments – including fees, charges and interest – in the event that they are unable or unwilling to pay.

A guarantor will share the burden of your home loan with you.

Your guarantor will have no rights to your home or anything else you purchase with your home loan. Basically the generous person who guarantees your loan will benefit in no way except for whatever satisfaction they get from helping you into a home. Would anyone you know do that for you?

Things to consider when guaranteeing a loan

This is not a decision to be entered into lightly by either party. When asking your parents to guarantee your loan the following points should be considered:

• If you can’t pay your loan, they will have to or if unable to may need to sell the property they have offered as security – is your guarantor comfortable with this?
• If they provide an asset as security for your loan, they may not be able to use it to secure a loan for themselves.
• If both you and the guarantor fail to make mortgage repayments your credit scores could both be damaged.
• Is your relationship solid enough to survive if something goes wrong?

Minimising the risk

To minimise the risk to both you and your guarantor it’s essential that you figure out how much you can afford, then set your loan repayments well within your means.

It’s also essential that your guarantor knows exactly what they’re getting into, what the agreement means and how much they must pay if something changes and you can’t make mortgage repayments.

If you’re unsure whether having a guarantor could help you, or need help getting approved for your loan the experienced mortgage brokers at Mortgage Choice are here to help. We can make sure that you and your guarantor know the state of play and get suitable loan products for your needs.