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Mortgage Basics

The PROS and CONS of having a guarantor to your loan

Guarantor

A guarantor is a third party to a home loan, helping you to get a loan by offering additional security as support. Guarantors are generally limited to spouses or immediate family members.

A guarantor is linked to a loan by a guarantee. This guarantee can be released and the guarantor’s responsibility stopped without the loan being repaid in full.

To use a guarantor, you must be able to service the entire loan on your income

PRO

Saving for a deposit can be hard for a number of reasons including having to pay rent for a long time, being single, having debt from studying and having just entered the workforce. If you don’t have a big enough deposit but you do have the ability to make the required home loan repayments, a guarantor could help you secure additional funds to buy a home.

Additionally, having a guarantor can help you avoid Lenders Mortgage Insurance (LMI).

Pros of guarantor

LMI is a premium payable by the borrower (you) that protects the lender against the potential loss it may incur if you are unable to repay your home loan. Most lenders will require you to take out LMI if they lend you more than 80% of the value of the property. However, some Lenders will waive LMI if you have a suitable guarantor on your loan

While it sounds like a somewhat easy gig (you just sign the dotted line right?) there are a number of things to consider before asking someone to take on the responsibility of acting as a guarantor.

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Cons of guarantor

CON

If you do not meet repayments, the lender can take legal action against you, and in some circumstances, your guarantor for the amount specified in the guarantee.

Also, a guarantor’s ability to borrow will be reduced after they have agreed to act as a guarantor

However, after you’ve built up enough equity in your property, your guarantor can ask to be released from the loan (although some fees and charges may apply to execute this)

We recommend speaking to one of Shore’s experienced Brokers in order to find out whether your family member is eligible to become a Guarantor and how they can help secure your loan.

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