The risks and rewards of using a guarantor for your home loan
Last updated on June 16th, 2023
Buying a home is a significant financial milestone for many Australians. However, high property prices and strict lending criteria can make it challenging for some individuals, especially first-time buyers, to secure a home loan. In such cases, utilizing a guarantor can be a viable option. A guarantor is someone, typically a family member, who offers their property or assets as security for the borrower's home loan. While this arrangement can provide numerous benefits, it is essential to understand the risks and rewards associated with using a guarantor in Australia. In this article we will discuss the risks and rewards of using a guarantor for your home loan.
Rewards of Using a Guarantor
- Increased Borrowing Capacity: One of the significant advantages of having a guarantor is the potential to increase your borrowing capacity. By leveraging the guarantor's assets as additional security, lenders may be more willing to lend you a larger amount, allowing you to afford a home that might otherwise be out of reach.
- Avoidance of Lenders Mortgage Insurance (LMI): Lenders Mortgage Insurance is a costly premium that borrowers typically pay when their deposit is less than 20% of the property's value. However, with a guarantor, you may be able to avoid LMI altogether, as the additional security provided reduces the perceived risk for the lender.
- Lower Interest Rates: Having a guarantor can also lead to lower interest rates on your home loan. With the increased security provided by the guarantor, lenders may be more inclined to offer you a more favorable interest rate, potentially saving you thousands of dollars over the life of your loan.
- Assistance for First-time Buyers: For individuals entering the property market for the first time, a guarantor can be a lifeline. It allows them to overcome the obstacle of saving a substantial deposit, helping them achieve their homeownership dreams earlier and potentially entering the market at a more affordable time.
_________________________
Read more:
Can you shorten your home loan term?
Consequences of Late Home Loan Repayments
How does rising inflation affect your borrowing power?
_________________________
Risks Involved in Using a Guarantor
- Responsibility and Financial Risk: The guarantor assumes a significant responsibility by pledging their property or assets as security for your loan. In the event that you default on your repayments, the guarantor may become liable for the outstanding debt, risking their own financial security.
- Strained Relationships: Mixing family or close relationships with financial obligations can potentially strain or damage these bonds. It's crucial to have open and honest communication with your guarantor, ensuring they fully understand the risks involved and are comfortable with their role in the loan arrangement.
- Limited Flexibility for the Guarantor: Being a guarantor can restrict the financial flexibility of the person providing the guarantee. The guarantor's property or assets may be tied up as security for an extended period, limiting their ability to sell, refinance, or utilize their own equity for other purposes.
- Impact on the Guarantor's Credit Profile: The guarantor's credit profile may be affected if the borrower fails to make timely repayments or defaults on the loan. This can make it challenging for the guarantor to secure credit for their own needs in the future.
Using a guarantor for your home loan in Australia can be a valuable strategy for overcoming barriers to homeownership, increasing your borrowing capacity, and potentially saving on costs such as Lenders Mortgage Insurance. However, it's important to carefully consider the risks and rewards involved. Open and transparent communication with your guarantor, seeking professional advice, and understanding the potential impact on relationships and financial responsibilities are crucial steps before embarking on this type of loan arrangement. Remember, while a guarantor can provide significant benefits, it should be a decision made with careful consideration and in the best interest of all parties involved.
Speak to a Mortgage broker today! about the risks and rewards of using a guarantor for your home loan.
