What Is A Guarantor?

A guarantor is a related third party that agrees to take on the loan repayments of the borrower, should they fall into default.

Under this arrangement the guarantor provides their home as additional security for the borrower’s loan. This lowers the risk of lending, enabling the borrower to secure a loan for 100% of the purchase price.

How a guarantor is different

Unlike a co-signer or co-applicant, guarantor’s obligations under the loan can be removed, if the guarantee is lifted.

This may occur because a condition is met or the guarantee is limited to part of the loan.

This means that the guarantor’s duties under the arrangement cease and the borrower is liable for the remaining debt.

Who can be a guarantor?

It largely depends on the banks’ lending policy. Some lenders will only approve a guarantee from the borrower’s parents.

This is known as a family pledge guarantee by some banks and a parental guarantee by others.

Lenders generally prefer this arrangement as there is a close connection between the borrower and the guarantor.

The guarantor generally knows whether the borrower is financially responsible or not.

Most guarantors would generally not expose themselves to such a high level of risk, if they knew that the guarantee was going to be called upon because the borrower could not make their repayments.

However there are lenders that don’t have such stringent policy and may allow other family members such as grandparents and siblings, to provide a guarantee.

Acceptable security property

As well as having restrictions on the type of guarantor that can provide a guarantee, some banks have certain requirements concerning the security property that is being offered by the guarantor.

Generally, most major banks view properties that do not have an existing mortgage, as more favourable security types.

This is because, if the borrower defaults, the bank will be first mortgagee and as such, will have priority in recovering their funds.

However, not all the lenders have the same restrictions!

If you want to provide a guarantee, but already have a first mortgage please call us on 1300 339 056 or enquire online today and one of our expert mortgage brokers will contact you to discuss your situation.

Why become a guarantor?

Most parents become guarantors so that they can assist their children to purchase a home.

Generally, their children are students who may have just started work and have been unable to save for a deposit.

A guarantee from their parents means that they can borrow 100% of the purchase price and achieve their dream of home ownership.

This can be a great arrangement from parents who know that their children are financially responsible and can manage the debt, but simply do not have a lump sum saved.

How can the guarantee help?

The benefit of obtaining a loan for 100% of the purchase price, is great for those that do not have a deposit saved.

The extra money can be very useful in helping the borrower pay for the upfront costs and duties that apply to the transaction.

Getting a guarantor loan means you can also avoid paying any Lenders Mortgage Insurance (LMI). Please continue reading for more information.

Avoiding Lenders Mortgage Insurance (LMI)

A guarantor loan also saves the borrower from paying Lenders Mortgagee Insurance (LMI) which can equate to thousands and thousands of dollars.

Whilst LMI is usually applicable for loans that are over 80% LVR, with a guarantor loan, there is no requirement to pay LMI.

For example, if a couple wishes to buy a property for $500,000, and needs to borrow $480,000, they would be borrowing 95% of the purchase price.

As this is over 80% of the land value, they would have to pay LMI.

However, if a guarantor offers their home as additional security for your loan, the LVR would decrease, falling below 80% and eliminating the requirement to pay LMI.

Releasing a guarantee

A guarantor can apply to the bank to remove the guarantee, as long as borrower has enough equity in their home.

Some fees may apply, so it is important to check with your bank to see what conditions must be met before the guarantee is released.

How a guarantor loan works

When a borrower purchases a home using a guarantor loan, that property is the primary security used by the banks.

However, under this arrangement the guarantor also offers their property as additional security for the borrower’s loan.

By doing so, the guarantor agrees to repay the debt owed by the borrower to the bank, in the event that the borrower defaults on the loan.

Risks of going guarantor

Becoming a guarantor involves a substantial degree of risk, especially if the borrower cannot properly manage their finances.

This is because if the loan repayments fall into arrears and the borrower defaults, the banks will exercise the guarantee, in order to cover any outstanding debt owed by the borrower.

As such, it is important that you seek financial and legal advice in relation to your obligations as a guarantor.

All responsible lenders will require that you do so, before they approve your loan.

It is also necessary that you ensure that the borrower has the financial capacity to take out a loan and make consistent repayments.

This will greatly minimise the risk that the loan poses to you. Please see our page on protecting the guarantor for more information.

Speak to us!

Still not sure how a guarantor loan works? Call us today on 1300 339 056 or enquire online and we can provide you with some more information.

We can even help you apply for a guarantor loan!

We know which lenders offer the most competitive loan packages for guarantor loans. Speak to the experts!