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A guarantor allows you to purchase a property sooner and potentially save thousands of dollars.
By using the equity they've built up in an existing property, a guarantor can help you to buy a home or invest in residential property - and the best part is, they don't need to actually provide you with any cash.
One of the most popular reasons that purchasers use guarantors is to avoid paying Lenders Mortgage Insurance (LMI).
This is a form of insurance that protects lenders from borrowers defaulting on loan repayments and is payable if you only have a small deposit. Your guarantor helps you avoid this charge by providing a guarantee for your home loan which is secured on their property.
What are the benefits of using a guarantor?
With market conditions becoming more difficult for first home buyers, more young couples are turning to their families to help them qualify for their first mortgage. And there are a lot of advantages in doing so.
Having a guarantor means you don’t need to save as big a deposit and because you can borrow more, you may be able to buy a larger property than you originally planned.
As previously mentioned, you can also avoid having to pay Lenders Mortgage Insurance (LMI), which can add a sizeable chunk to the cost of securing a home loan.
A further advantage is that some lenders will allow you to consolidate some minor debts into your new mortgage such as personal loans and credit cards, as long as they make up no more than five to 10 per cent of the purchase price.
And finally, a security guarantee is flexible enough that a guarantor can choose a limited amount of liability and can be released from the loan at a mutually agreed time, so the borrower doesn’t have to feel obliged to their guarantor for any longer than necessary.
What are the drawbacks of using a guarantor?
The main drawback of using a guarantor is that you are putting their property at risk. While in most cases that risk is minimal, given that you should be well equipped to pay off the loan and only need some help with the deposit, the risk is there nonetheless.
You could get sick or lose your job tomorrow and the lender would then turn to your guarantor for their loan repayments.
It is for this reason that anyone considering going guarantor for someone should seek legal advice before doing so.
It is a major financial decision and should not be entered into lightly and a solicitor can explain your legal rights and obligations and advise on the most prudent way forward.
