What Is A Guarantee?

Parents acting as a security guarantorIs your child or someone you know struggling to obtain a home loan?

This may be because they do not have enough funds to put toward the purchase price. This is where you come in!

By signing a guarantee, they will be able to borrow 100% of property value. To find out what a guarantee is, please read on.

Signing a guarantee

A guarantee is an agreement from a third party to fulfil the debts of another, in the event that they cannot meet their obligations.

However, in lending terms, it is where a third party guarantees the repayment of a loan for the borrower. This promise is made to the lender or bank that is providing the loan. It is the lender that will call on the guarantor in the event that the borrower defaults on the loan.

For this reason, the guarantor must carefully assess whether it is likely that the guarantee will actually be called upon.

If your child wishes to borrow and you are considering going guarantor, it is best that you speak to a legal and financial expert first.

They can help you determine whether this agreement is risky or suitable for your situation.

How does a guarantee work?

Generally, the borrowers will be the children of the guarantor. They will be looking to buy a home, but may not have a sufficient deposit amount. By obtaining a guarantee from their parents, they will be entitled to borrow 100% of the purchase price.

For example, Lauren and Time wish to buy their first home for $300,000. Both of them have a good income and can meet the monthly loan repayments.

However, they do not have a deposit saved, nor the funds to cover the fees and costs associated with borrowing.

Their parents decide to go guarantor, allowing them to borrow 100%. This means that they do not have to pay any Lenders Mortgage Insurance (LMI).

This makes guarantor loans a very attractive option for those who have the capacity to repay the loan, but do not have the money to contribute to the purchase price.

What are your obligations under a guarantee?

If you are providing a guarantee on a home loan, then you as the guarantor are liable to make payments on the home loan, where the borrower can no longer meet their obligations.

Generally, most guarantees are not limited to a specific transaction, and covers all the debts owed by the borrower to the creditor, potentially including future debts.

Depending on the bank or lender that the funds are obtained from, the guarantee can be limited, usually to 25% of the loan amount.

Does the guarantee include interest on the loan?

In most cases, guarantors are required to pay the principal amount and interest on the mortgage.

If the borrower defaults and the lender has to take legal action to enforce payment of the debt against either you or the borrower, you may also be liable to pay any of the costs associated with this action.

This is why it is very important to carefully consider whether a guarantee is the right option for you and your family.

What else does a guarantee include?

In most cases, the guarantee is supported by a mortgage over the guarantors property to provide security for the lender.

This limits the risk of lending the full purchase of a property to the borrower.

Although the borrower may be able to meet the weekly or monthly loan repayments, there is still a considerable amount of risk in lending to them. It is for this reason that a guarantee is so important.

When can the bank enforce the guarantee?

The Code of Banking Practice states that banks should only call on a guarantee if attempts to recover money from the borrower have been unsuccessful.

This means that lenders should exhaust all avenues to recover funds from the borrower. The bank will generally sell the borrowers property and then turn to the guarantor for complete fulfilment of the debt.

Releasing the guarantee

The guarantee will be discharged when the borrower has paid off their loan.

However, some agreements between the guarantor and the lender, stipulate that the guarantee will be released after a certain period of time lapses, generally five years.

Additionally, you may be able to make a request to the lender at any time, to release the guarantee. This will generally be assessed by a credit manager.

Talk to our specialists!

We are the experts in guarantor loans! Our team of mortgage brokers has the experience and knowledge to ensure that your loan gets approved! Call us today or enquire online.