5 Things to Think About Before Becoming a Guarantor 

Many aspiring first home buyers have a hard time saving a big enough deposit to buy a first home in Australia. One way around this problem is to get financial support from their parents, who can act as a guarantor for their home loan. If you’d like to help your children buy a first home, before deciding to become one, it’s important to think about these 5 things.

1. What it means to be a guarantor

A guarantor is someone who guarantees or provides security for a home loan – or part of the home loan – for someone else. If the borrower defaults or fails to meet the repayments, the guarantor is responsible for repaying the loan amount or the amount guaranteed. 

While the guarantor doesn’t actually pay the lender any money up front, and the borrower will still have to make repayments to the lender, you are required to meet their obligations as a guarantor should the borrower default. 

2. How much money you might have to repay as a guarantor

Becoming a guarantor for someone else’s home loan is a serious commitment. If the borrower defaults, the guarantor may be required to repay all of the home loan including interest depending on the type of guarantee that was signed. 

If the guarantor is unable to repay the loan, the lender may repossess their home or car if it was used as security for the loan. Which is why, before entering into this type of arrangement, it’s important to get independent legal advice about what it means to be a guarantor. 

3. Whether you have enough equity in your own home

Guarantors who own property may be able to use the equity in their own home as security for part or all of the borrower’s home loan, provided they have enough equity. However, if the borrower defaults, the guarantor could risk losing their own property to repay the loan. 

Instead of guaranteeing the full loan amount, you may choose to act as security for part or all of the deposit so that the borrower qualifies for a home loan without having to pay a 20 per cent deposit. In this way, the borrower also avoids having to pay Lenders Mortgage Insurance (LMI). And once the borrower has repaid the guaranteed portion of the loan, they can request the guarantor be released from the loan. 

4. Whether the person you’re helping will repay their loan

Of course, one of the biggest considerations for guarantors is whether the person they’re assisting is financially able and ethically responsible enough to repay their loan. Because if they are unable to repay their loan, the financial burden could fall on you.  

Just like other home loan agreements, even those with a guarantor will still require the borrower to demonstrate to the lender that they can afford their home loan repayments, and that they are financially responsible for managing a debt of this size. 

5. How this will impact your own financial wellbeing

Understandably, acting as a guarantor for someone else’s loan has several financial implications. It’s important to consider how having to repay someone else’s loan could impact your own financial position.  

For those nearing retirement age or who may be expecting a change in circumstances – perhaps a new job, selling the family home, or a drop in income – becoming a guarantor may not be in their own best interests. 

Equally, it’s not hard to see how a borrower defaulting on a guaranteed loan could lead to family squabbles. Both you and the borrower will need to decide whether a guarantee arrangement could work for them. 

Finally, it’s vital that both parties completely understand and agree with the conditions and obligations of this type of arrangement. Getting legal and financial advice is a must! 

If you’re considering becoming a guarantor for a family member’s home loan, talk to a mortgage broker at Lending Connections.