Going guarantor for a family member or close friend is not as simple as you think…
It is very easy to understand why when asked to go guarantor by a member of your family or a close friend (“the borrower”) who wants to buy a home, that you would be willing to go guarantor.
But there are risks that you should be aware of if the borrower is unable to meet loan payments because of unforeseen circumstances or relationship break downs, as these factors may impact on your own financial commitments or opportunities you may wish to take up in the future.
One of the most common types of guarantee security for home loans is a security guarantee which means that instead of giving the person you are going guarantor for money to put towards the deposit, you give the equity the use of that has accrued in your property. The loan to the borrower is secured using both the property being purchased and your own property.
The purpose is often to reduce the amount being borrowed to less than 80% of the proposed purchase price so that the borrower can avoid paying lenders mortgage insurance. This will assist the borrower greatly, but there are no direct financial rewards for you. It is very important to realise there is a lot of responsibility attached to becoming a guarantor. For example, if the borrower is unable to afford the repayments, you will be responsible for paying off the remaining amount of the loan, or have to sell the property you used as security to repay the debt.
If you as guarantor want to sell your property in the future you may not be able to rely on all the equity in your property to secure a new property as an amount equivalent to the amount secured under the existing property as the guaranteed amount would need to be secured against the new property.
If you want to sell the property outright and for example go travelling (and not invest in a new property straight away) an amount equivalent to the amount secured under the existing property would probably have to be held in a term deposit for the term of the borrower’s debt, or until the borrower’s property is sold.
Other points to consider when going guarantor are:
- If the borrower defaults and you are required to make the repayments, but are not in a position to do so, it will affect your credit rating;
- Even if you are not making repayments on the borrower’s loan, when applying for credit, a financier will most likely include the maximum potentially guaranteed amount when considering your application, and this may affect your chances of obtaining the credit.
We very strongly recommend that you seek independent advice before becoming a guarantor. There could be other options worth pursuing which may assist the borrower but reduce your responsibility or liability.
If you or someone you know wants more information or needs help or advice, please contact us on (07) 5443 4866 or email firstname.lastname@example.org.