How to prepare for being a guarantor

One of the hardest parts of buying a property can be saving the deposit. A guarantor home loan could give buyers the chance to enter the market years ahead of schedule by using a guarantor (generally a parent or close relative) to cover some or all of the deposit. As a result, buyers could potentially qualify for a home loan with cash savings equivalent to just 5% of the purchase price or even 0%.

If you’re thinking you could be that person for a prospective first-home buyer, what are your next steps? What should you keep in mind if you’re thinking about becoming a guarantor?

Criteria

The first thing to think about is whether you meet the qualifications to be a guarantor. Many lenders will only accept guarantors who have a strong relationship with the buyer, such as a parent or guardian. They will also look at your credit history and ability to repay the loan should the buyer default. This means you must have sufficient equity in your property. As part of this process, a valuation of your property will be undertaken.

Legal considerations

You also need to ensure that you are willing to accept legal responsibility for the repayment of the loan. For instance, if the buyer fails to keep up with their mortgage repayments, the lender may chase the guarantor for payment; it’s even possible the lender may seize and sell the guarantor’s property to recoup its debt.

Because of this, it is a good idea to seek legal advice. Like many financial decisions, becoming a guarantor does involve a certain level of risk so it’s important that both parties have a clear understanding of the expectations of the agreement.?

Mitigating the risk

Understandably, this is a decent risk to take on as a guarantor. However there are a few things to consider that could mitigate the risk. For one, some guarantor loans can be set up as two loans, with the guarantor’s property used as security to cover only a percentage of the total amount borrowed (usually to cover the deposit). Secondly, a guarantor does not need to be tied to the mortgage for the life of the loan. After a few years, once the buyer has built 20% equity in the property (potentially through a combination of paying down some of the mortgage and having the home rise in value), the buyer can refinance and remove the guarantor from the loan contract.

Alternative options

It’s important to note that being a guarantor is not for everybody and it’s certainly not the only solution that can be effective in helping people to enter the property market without a 20% deposit. Some of these other options include the buyers paying lenders mortgage insurance or applying for any government schemes that may be available. As a broker, I chat through all available options to help find the right one for each of my clients.

If you’re investigating the possibility of becoming a guarantor or know someone who is looking to enter the property market, reach out to me today.?