We believe in responsible lending practices and will not assist someone to obtain a guarantor home loan if we believe there is a high chance that the guarantor could get into trouble as a result. Part of our services is to help reduce the risk to the guarantor.

How responsible is the borrower?

Generally the guarantor is a close family member and has known the borrower for a long time. If their gut feeling is that the borrower isn’t ready to take on the responsibility of a home loan then we don’t recommend that they enter into this arrangement. If their relationships, finances and employment are all stable then everything usually works out fine.

A handy hint: Ask the borrower for 3 months statements for their main cheque account. Look at how their money moves in and out of the account to see if they are good at handling their money. In particular look for several ATM withdrawals in the same day from a pub or club as this may indicate a gambling habit.

Insurance / Financial buffer

We recommend that the borrower consider taking out several types of insurance to prevent the possibility of a major problem in their life from putting the guarantor at risk. Generally we recommend one or more of the following types of insurance:

• Income Protection Insurance
• Life / Total & Permanent Disability Insurance
• Loan Protection Insurance

In addition to one or more of these insurances we also recommend that the borrower keep around $10,000 in their loan account as available redraw. This can be drawn down in an emergency or in the event of an unexpected major expense.

The combination of keeping some spare funds on standby and a well designed insurance package will prevent many problems in the future and give both the borrower and the guarantor peace of mind.

Financial responsibility

Did you know that one of the main reasons why people default on their home loans is not because of the home loan repayments, but instead is because they have taken on too much consumer debt. When the home loan and other debt repayments are combined they are simply too much to cope with and the borrower starts missing payments.

When you buy a home you need to begin to limit your spending and begin making extra repayments to your loan.

• Reduce your credit card limits or cancel your credit cards.
• Don’t pay for holidays and other luxuries on credit.
• Don’t use a car loan or personal loan to get the things you want.
• Make regular extra repayments to your home loan, you can then redraw these extra payments to help pay for life’s little pleasures.

Living a lifestyle beyond your means and funding it using credit will get you into a lot of trouble if you already have a home loan to repay.

Contingency plans

So what should you do if things don’t go to plan? We recommend that you talk to your lender to work out a solution. Most lenders are willing to work with you for quite some time and only see selling the property as a last resort.

If you are unable to afford the repayments then it may be a good idea to move into a smaller rental property (or moving back in with your parents) and to rent your existing home out. The combination of the low rental expense and negative gearing benefits may be able to help you afford the debt.

If the previous option will not work then consider selling some of your assets such as your car, shares or having a garage sale.

Another little known solution is for people to access their superannuation before retirement because of financial hardship. There are particular circumstances when this is possible, refer to your super fund for more information.

As a last resort you should sell your property rather than risk the guarantor losing their property. You should take action to put your property on the market rather than the lender doing it for you and possibly forcing a quick sale.

Get legal advice

We strongly recommend that all guarantors seek legal advice before entering into a guarantee for someone else’s loan. Most lenders will put this as a condition to them giving approval for the loan anyway, however we cannot stress this point enough. The guarantor must be fully aware of how a guarantee works and the consequences of entering into a guarantee.

Speak to an expert mortgage broker

We are specialists in guarantor home loans and know how to protect the guarantor. We’d love to work with you to help you buy a property using the help of a guarantor. Please enquire online and one of our staff will give you a call to see if this type of home loan is suitable for you.