First home buyers often struggle to save for the deposit needed to buy their first property, but a parent or relative may be able to help by becoming guarantor of the loan. The guarantor is legally responsible for paying the other person’s debts if the debtor can’t pay them.
This is a kind gesture but it is a risky one. Before accepting the role of guarantor, we encourage you to think carefully about your finances, make sure you understand the loan contract, and the risks involved.
Benefits of going guarantor
While there are no financial benefits for going guarantor, there are significant benefits for the person you are helping.
Helping an adult child purchase their first home can be very satisfying for parents. Seeing a child own a home rather than renting may be important emotionally for some parents and others may feel that buying a property is important as a financial investment.
By helping your family member enter the housing market with a smaller deposit, it could increase their borrowing capacity beyond what they could otherwise afford. This could also potentially help them avoid paying thousands of dollars in Lender’s Mortgage Insurance (LMI), which applies when a borrower cannot pay a deposit of at least 20%.
Risks of being a guarantor
There are several risks to consider before agreeing to be a guarantor.
If at any stage the borrower can’t make their loan repayments, you will have to pay back the entire loan amount plus interest. Your credit report will be affected and you could also lose your home or car if they are used as security on the loan.
As a guarantor, your eligibility for loans in the future may be impacted as the lender may see this as a financial risk.
How to get help
If you’re thinking about a guarantor arrangement with a family member, we encourage you to do your research and understand the risks involved. If you don’t feel comfortable guaranteeing a loan, there are other ways to help. You may be in a position to contribute some money that they can be put towards their deposit.
Seeking financial and legal advice is very important before making any decisions and it is also a common requirement of banks or lenders in the process. Our team of financial and legal experts are here to help answer all of your questions, big or small! Click here to learn more about APS loan options.