If you are looking at property or have spoken to a financial institution about a home loan, you may have heard the term guarantor thrown around. For those new to the property market, a guarantor can be a great option for borrowing money to purchase a property. So, what exactly is a guarantor?
Definition of a guarantor
A guarantor is “an individual who promises to pay a borrower’s debt in the event that the borrower defaults on their loan obligation” (Investopedia). Their assets will act as collateral against a loan if you fail to make repayments. It is not uncommon for parents to be guarantors, using their own home as an asset.
Why you might need one
A guarantor provides security to the purchaser and the financial institution providing the home loan and allows you to borrow more. Having a guarantor can also reduce additional costs associated with a home loan. For example, if you don’t have a 20% deposit for the property you are hoping to purchase, most lenders ask for Lenders Mortgage Insurance (LMI). With a guarantor, you can buy a home with less than 20% deposit and avoid the LMI entirely.
The risks of being a guarantor
It’s important to understand the risks associated with a guarantor for all parties involved. The most obvious risk is, of course, the guarantor having to pay back the debt or lose their asset (usually a home), also resulting in bad credit in the future. It can also stop the guarantor from getting a loan themselves as another financial institution may look on it unfavourably. Ultimately, it could damage the relationship between you, as borrower, and the guarantor.
Need help deciding if a guarantor is right for your situation?
Deciding whether or not to have a guarantor is a big decision that should be weighed appropriately. Our team at Offset Property can review your situation and look over loan contracts to ensure you know your options and can make an educated decision. Get in touch to discuss your property investment options today.
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