Using a guarantor? Here’s what you need to know

Saving for your first home is a big hurdle. With a willing and eligible guarantor, your dream property may be more attainable than you think. But there are risks for the guarantor, so consider the following before heading down this path.

A guarantor is usually a close family member who guarantees the security of your loan using equity in their house. Your loan is secured by both the property you are purchasing and your guarantor’s property.

This means you don’t necessarily need to cough up the full 20 per cent deposit needed to avoid Lender’s Mortgage Insurance (LMI). Most lenders, though, will expect you to make some contribution from your own savings, and all lenders will need solid proof that you will be able to meet the repayments without the guarantor.

The guarantor also needs to be able to meet the repayments, or have some other means of repaying any residual debt, if you cannot.

As well as this, the amount may increase due to lender fees, interest post default, and selling costs, should you need to sell your property. In the worst-case scenario, your guarantor may lose their own property if repayments cannot be made, though the lender will usually make every effort to solve the problem before reclaiming property.

Your guarantor may be liable if you cannot pay back the loan

If you cannot meet your repayments, the lender might be forced to take legal action, and depending on the agreement, your guarantor may be liable. Your guarantor therefore needs to trust that you will be able to make the repayments, and must have enough equity or income as personal security, should this come to pass.

Your guarantor needs to be a trusted family member

There are significant risks to becoming a guarantor, so the lender will usually only approve a guarantor who is directly related to you. In most cases, this will be one or both, and in some cases, a grandparent, sibling, or a de facto may be eligible to become a guarantor.

The guarantor should seek independent financial and legal advice

Most lenders will require your guarantor to seek independent financial and legal advice before accepting the role. The lender needs to know that the guarantor is in a position to cover the loan if it goes pear-shaped.

You won’t need your guarantor forever

If the value of your property increases or you pay off enough equity to cover 80 per cent of your mortgage, you may be in a position to  relinquish your guarantor from responsibility, as long as your repayment history is good.

Bear in mind that your guarantor might also be able to guarantee part of your loan, which reduces their responsibility.

Make sure you and your guarantor understand the arrangement you are both entering in to, and have clear and open discussions, so you are both on the same page.