Getting yourself on the property ladder is a pretty daunting task, especially now that house prices are continuing to increase and there are a lot of barriers to entry. You might have been thinking about using a guarantor to help you get your home loan, but there are a few things that the potential homeowner and guarantor should know first.
What is a guarantor?
A guarantor is usually a close family member with equity in their property who is willing to help you if you don’t have a big enough deposit saved to meet bank criteria.
They legally vouch for your ability to pay, so if you fail to meet your payments they will need to cover them. Although this sounds like a good option, there are some pros and cons to consider.
Get on the property ladder
If you’re struggling to get onto the ladder and you’re worried about being able to buy a home, using a guarantor can help you get your foot in the door sooner.
Buy without a deposit
If you’re struggling to save enough money for your deposit, a great way to get the remaining amount is using a guarantor. For example, If you have a 5% deposit saved, your family member can guarantee a further 15% of the deposit using their equity.
Increase your borrowing capacity
Using a guarantor can increase your potential borrowing capacity as banks may see you as a lower risk. This will help you to expand your options in your search for a new home.
Usually, if you don’t have a deposit of at least 20%, lenders may require you to pay Lenders Mortgage Insurance (LMI). This can add on thousands of dollars so having a guarantor behind you will mean you can dodge these fees.
Agreeing to be a guarantor to help your loved one into a home may seem like a great idea, but it’s important to think about the long-term commitment. The average mortgage lasts around thirty years, and you’ll be liable for this time. It may help to use a mortgage adviser so they can negotiate on your behalf with the lender to limit your guarantee to a fixed sum of money and avoid the long-term commitment.
Your property is at risk
Being a guarantor can put your property at risk if you’ve used the equity in your home as security. If the borrower can no longer repay their mortgage, you risk losing your home to the lender.
Mixing financial and family relationships can cause emotional pressure – things can get messy and potentially ruin the relationship with your loved ones. It’s important to evaluate both parties’ finances and relationships before signing the dotted line.
If the borrowers can’t pay the mortgage back for any reason, the banks will chase you for the cash. This is a lot of financial responsibility to take on so it’s important you understand what it means once you sign.
To learn more about your options for getting onto the property ladder, get in touch with our friendly mortgage team today.