Pros and Cons of Guarantors
Pros and Cons of Using a Guarantor
When you want to buy your first home in Australia, you might not have saved enough for a deposit yet. This is where a guarantor can help. But what does this really mean, and is it the right choice for you? Let’s look at both the good and bad sides of using a guarantor.
What Is a Guarantor?
A guarantor is someone (usually a parent or close family member) who promises to help pay back your home loan if you can’t. They use their own property as security to help you get approved for a loan. Think of it like having someone vouch for you when you need help.
The Good Things About Guarantors
You Can Buy a Home Sooner
The biggest benefit is that you don’t need to save a full 20% deposit. Sometimes you can even buy a home with no deposit at all. This means you can become a homeowner years earlier than if you had to save up the full amount yourself.
For many young Australians, house prices go up faster than they can save. Having a guarantor helps you get into the market now instead of waiting and watching prices climb even higher.
No Lenders Mortgage Insurance
When you borrow more than 80% of a property’s value, banks usually make you pay Lenders Mortgage Insurance (LMI). This insurance can cost thousands of dollars. With a guarantor, you often don’t need to pay this expensive insurance because the bank has extra security through your guarantor’s property.
Saving this money means more cash in your pocket for furniture, moving costs, or keeping as emergency savings.
Better Loan Approval Chances
Banks feel safer lending money when someone with a good credit history and property backs you up. This means you’re more likely to get approved for your home loan. You might even get better interest rates because the bank sees you as less risky.
Build Your Own Credit History
Once you start making regular repayments on your loan, you’re building your own good credit history. After a while (usually one to two years), many people can refinance their loan and remove the guarantor completely. This happens when you’ve paid down some of the loan and your property has gone up in value.
The Not-So-Good Things
Big Risk for Your Guarantor
This is the most important thing to understand. If you can’t make your loan repayments, your guarantor becomes responsible for paying them. The bank can even sell your guarantor’s property to get their money back.
This is a huge responsibility and risk for someone to take on, even if they’re your parents. Family relationships can become strained if financial problems happen.
Limited to Close Family
Banks in Australia usually only accept parents or sometimes spouses as guarantors. You can’t use friends or other relatives. This limits who can help you.
Your Guarantor’s Borrowing Power Gets Affected
When someone becomes your guarantor, it affects their ability to borrow money themselves. Banks count your loan as part of your guarantor’s debt, even though they’re not making the repayments. This could stop them from getting their own loans for cars, renovations, or investment properties.
Legal Costs and Paperwork
There’s extra paperwork when using a guarantor. Your guarantor needs to get independent legal advice to make sure they understand what they’re agreeing to. This costs money and takes time. Everyone needs to understand the legal agreement fully.
Can Create Family Pressure
Money and family don’t always mix well. If you’re struggling to make repayments, you might feel guilty or stressed about putting your guarantor at risk. Some people find this pressure affects their family relationships.
Might Encourage Overborrowing
Having a guarantor makes it easier to borrow money, which could lead some people to buy a more expensive house than they can really afford. Just because you can borrow more doesn’t always mean you should.
Things to Think About Carefully
Before asking someone to be your guarantor, have honest conversations about:
- Can you comfortably afford the loan repayments every month?
- What happens if you lose your job or get sick?
- How will this affect your guarantor’s plans?
- Do you have a plan to remove the guarantor from the loan later?
Your guarantor should also talk to their own financial adviser or lawyer. They need to understand the risk they’re taking on.
The Bottom Line
Using a guarantor can be a smart way to get into the property market sooner, especially in Australia’s competitive housing market. It helps you avoid costly insurance and can save you years of saving for a deposit.
However, it’s not a decision to make lightly. The risks for your guarantor are real and serious. Make sure everyone involved understands what they’re signing up for.
If you’re thinking about using a guarantor, talk to a mortgage broker. They can explain your options and help you figure out if it’s the right choice for your situation. They can also show you how much you could borrow and what your repayments would look like.
Remember, buying a home is exciting, but it’s also one of the biggest financial decisions you’ll ever make. Take your time, ask questions, and make sure you understand everything before signing any documents.
The right choice depends on your personal situation, your relationship with potential guarantors, and your financial goals. There’s no one-size-fits-all answer, but with good information and professional advice, you can make the decision that works best for you.