The property market is at an all-time high, with it getting harder and harder for first-home buyers to secure an affordable home. These high property prices mean that buyers without significant financial resources are going to have trouble, with banks being less likely to risk their capital for these types of applicants. A home loan guarantor can help reduce this risk, however, there are significant risks involved. This article will discuss the pros and cons of guarantors to help you determine whether you need a guarantor for your home loan.
What is a Home Loan Guarantor?
A home loan guarantor is where an external party, usually a family member, guarantees the loan if the primary borrower is personally unable to pay it back. This guarantor then becomes responsible and liable for paying back the loan. A guarantor also provides equity as security, usually a part of their home.
This type of loan allows for those without an appropriate level of savings to get into a ballooning property market. Whilst there is a primary loanee undertaking the mortgage that has to manage repayments, a guarantor acts as a lifeline for the lender.
Benefits of a Guarantor
A home loan backed by a guarantor helps reduce the initial upfront payment, as there is less risk associated with the home loan application. Lenders Mortgage Insurance (LMI) is usually not required with a guarantor. LMI usually acts as security for a bank giving out loans that do not have 20% already saved by the borrower, however, with Guarantor loans, the security of guarantor acts as the “insurance” that the bank would otherwise use.
Avoiding this costly expense of LMI means that you have more money you can put towards paying off the loan. You can also feel safe and secure, knowing that if there are any issues with your loan, it is secured with a tangible asset, and you will not be bankrupted.
Negatives of a Guarantor
The biggest negative of a guarantor is that you are attaching the risk of taking out your home loan with a loved one.
If you are unable to pay off your loan:
- Your guarantor’s credit report could be damaged
- Your guarantor might have to re-enter the workforce to help assist in paying off the loan
- Your guarantor might lose their home
Alongside this, statistically speaking, individuals who usually request guarantor help tend to experience more financial stress and have difficulty in meeting mortgage repayments. Is it safe for your guarantor to help you out? They need to be careful and considered with their decision.
What Are Some Other Ways You Can Receive Home Loan Help?
- Having money chipped in for the loan deposit, whether this be a cash gift, or a personal loan
- Moving back home with your parents, reducing rent and bills expenses
- Co-signing the home loan, making them legally responsible for mortgage repayments, but not needing to put up their house for security