For many first-time homebuyers, getting a home loan can be a challenge, especially if they don’t have a substantial deposit or they have a low credit score. This is where a Guarantor can help. A Guarantor is someone who agrees to take responsibility for the borrower’s loan if they are unable to repay it. While going Guarantor on a home loan has its advantages, there are also some drawbacks that need to be considered carefully. In this blog, we will discuss the pros and cons of going Guarantor on a home loan.
These are general observations from Eckermann Conveyancers based on what we’ve seen over the years with Adelaide conveyancing transactions where a guarantee is involved. Guarantors should seek legal and financial advice from professionals in those areas if they have any questions in relation to their specific circumstances.
Pros:
- The borrower is able to get a loan when they otherwise might not have or at a cheaper rate and/or with better terms than without the Guarantor in place.
The primary benefit of going Guarantor on a home loan is that the borrower can get a loan when they might not have been able to otherwise. If the borrower has a low credit score or doesn’t have a sufficient deposit, a Guarantor can help them secure a loan with better terms or at a lower interest rate. Having a Guarantor also provides lenders with added security, which makes them more likely to approve the loan application.
Another significant advantage of having a guarantor on a home loan is that the borrower may be able to borrow a larger loan amount. Lenders are more willing to lend to borrowers with a guarantor because they have an additional person liable for the loan, which means they have a lower risk of default.
The borrower may also be able to secure a better interest rate on their home loan. A lower interest rate can mean significant savings over the life of the loan.
- The Lender fees involved may be reduced as Lenders Mortgage Insurance isn’t needed where there is a Guarantor in place.
In addition to helping borrowers secure a loan, having a Guarantor can also save them money. One of the most significant expenses associated with a home loan is Lenders Mortgage Insurance (LMI), which is usually required if the borrower has less than 20% of the property value as a deposit. However, if a Guarantor is in place, lenders may not require LMI, which can save the borrower thousands of dollars.
- The home buyer is able to get onto the property ladder to grow their personal wealth.
A Guarantor loan may offer the borrower the opportunity to get onto the property ladder earlier in life. Owning a home is an essential part of building personal wealth. By securing a loan with the help of a Guarantor, the borrower can start building equity in their home, which may increase in value over time. This can be especially important for young adults who may struggle to save for a deposit on their own and may face rising housing prices in the future.
- The home buyer can start to build their credit score.
For a first-time buyer who does not have a credit history, having a guarantor can help them establish their own credit score. As loan repayments are made on time, their credit score improves, making it easier for them to qualify for future loans or credit.
Cons:
- The Guarantor’s property and or assets are used as security for the lender for extra security of the loan.
While going Guarantor on a home loan has its advantages, it also comes with some risks. The most significant risk is that the Guarantor’s property and assets are used as security for the loan. If the borrower defaults on the loan, the lender can seize the Guarantor’s property and assets to recover any outstanding debt. This means that the Guarantor’s financial situation can be severely impacted if the borrower fails to make loan repayments.
- If the borrower defaults on the loan and the lender cannot recoup all funds, then they will rely on the Guarantee to seek the shortfall from the Guarantors.
Another risk associated with going Guarantor on a home loan is that if the borrower defaults on the repayments and the lender is unable to recoup all funds, they may rely on the guarantee to seek the shortfall from the Guarantor. This means that the Guarantor may be responsible for repaying the outstanding debt, even if they were not aware of the borrower’s financial difficulties.
If the Guarantor has provided a Guarantee for the loan using their property as security, it could be at risk if the borrower defaults. If the Guarantor cannot make the repayments, the lender may take possession of the property to recover the loan, which could have significant financial consequences.
- The Guarantor needs to be comfortable with the borrower’s ability to repay the loan as required.
They also need to be comfortable that the property used as first security is being maintained by the borrowers so the value can be recouped if the lender has to sell the property.
To minimize these risks, the Guarantor needs trust the borrower’s ability to repay the loan as required. This means that they need to be confident that the borrower has a stable income, and the right financial management habits to be able to make those repayments.
- The Guarantors ability to borrow in the future may be reduced because of the Guarantee they agreed to enter.
Being a Guarantor can impact your ability to borrow money in the future. If you become a Guarantor for someone else’s loan, it can reduce your borrowing capacity, as the liability for the loan will be considered when applying for credit in the future.
Agreeing to act as a Guarantor for a home loan can also create an emotional burden for the Guarantor, particularly if the borrower experiences financial hardship or difficulty repaying the loan. The Guarantor may feel a sense of responsibility or guilt for the borrower’s situation, which can be challenging to manage.
Going Guarantor for a home loan can be a smart solution for aspiring homeowners with limited finances. However, it’s essential to consider the pros and cons before signing an agreement. It’s crucial to discuss the terms thoroughly and understand the potential risks and outcomes before entering into the agreement. If all parties are comfortable with the arrangement, going Guarantor can be an excellent solution to achieve homeownership.
