Becoming a guarantor is a big responsibility, so you will therefore need to make sure that you get all of the tips and advice you can before moving forward. The more of this information you get, the better off you will. This definitely isn’t something that you should rush into, because you will very likely end up regretting it. Since you will be responsible for paying back the primary borrower’s loan in full if they cannot, you will need to get all the information you can before proceeding.
Benefits of having a Guarantor
There are lots of different benefits of having a guarantor, including:
Some lenders will let you borrow 100% of the purchase price plus 5% costs of your first home or investment property without any proof of savings whatsoever.
You will save a significant amount of money on the Lenders Mortgage Insurance (LMI) premium.
You will have a much easier time borrowing a higher amount because the lender will feel more comfortable knowing that someone will take over paying back the loan if the primary borrower cannot for whatever reason.
The fact is that a person can usually borrow a lot more money if they have a guarantor, so you will need to keep that in mind if you are the one borrowing.
Impacts of being a Guarantor
You will need to fully understand that you will be completely responsible for paying back the loan that your friend or family member is taking out if they are not able to for any reason. As a guarantor, you are bound to pay the loan if the borrower defaults, but the transaction can have a negative impact on your credit score as well.
Have you been asked to be a Guarantor?
If you have been asked to be a guarantor for someone who wants to take out a home loan, you will need to know what you are getting out of it. You will be assuming a pretty big risk, so you definitely want to get everything in writing before proceeding.
As a guarantor:
You are responsible for paying back the loan in full if the borrower defaults for any reason.
You may be required to service the portion of the loan that you have placed a guarantee for in the event of loan repayment default.
You could lose your house if the borrower defaults on the loan.
You can provide either your owner occupied or investment property as security.
You may have to refinance your existing loan to provide a guarantee to the borrowers.
You may discover that some lenders will refuse to accept 2nd mortgages as security for the guarantee.
Seek independent legal and financial counsel
Before you make everything official, you will need to seek out independent professional legal and financial advice from qualified persons. It is crucial that you have a full and complete understanding of all your legal and financial obligations as a guarantor.
Consider your decision carefully
You will definitely want to take all the time necessary to carefully consider whether or not you want to become a guarantor for someone else. It’s also a good idea to make sure that the person who is asking you to be a guarantor is trustworthy; you should know this person very well. Since there is always the risk of the person defaulting on the loan and leaving you with the rest of the payments, it is essential that you trust them completely.
Other things to keep in mind
Becoming a guarantor is a very big deal because of the potential risk involved. Since you could lose your home if the borrower can no longer make repayments on the loan, you will need to evaluate your own financial situation and decide if it’s a risk you can afford to take. The more time you spend thinking about these things, the better your chances will be of making the right decision overall. You absolutely do not want to rush into this kind of decision. Those who take all of these things into consideration should be able to minimize their risk as a guarantor.