Get a trusted guarantor on board.
When the option to buy a house comes along with getting the help of a dear family member or friend, a guarantor loan is your go-to funding solution. It has its own caveats, but our home loan specialist will guide you through understanding it well, finding the right mortgage product and lender, processing the application, and eliminating risks both for you and your guarantor.
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You have found your dream home – everything from price to size to location is perfect. The only thing standing in your way is getting that home loan approval that you need to make the purchase. Getting a mortgage can be quick and easy if you fit the lender’s requirements. Together with your mortgage broker, you should be able to complete the needed paperwork with your income, assets, deposit, and credit score.
This is the ideal scenario which is not always the case for all borrowers. In some instances, when you do not meet the lender’s requirements, you have the option to apply for a loan with a “guarantor’s” help. How does this loan work? What are its pros and cons? Read more to find out.
What is different about a guarantor loan?
A guarantor loan is a specific home loan type that requires you to get a family member or friend to guarantee that you will be able to meet your mortgage repayments. If you miss a repayment, it will be up to your guarantor to make it. This gives lenders an extra degree of assurance as they are no longer exclusively depending on you to make the payments.
Getting a guarantor loan is the most common way of avoiding the lender’s mortgage insurance or LMI. However, it does require that you have someone in your close circle with the means to pay off your debts and that that person will be willing to put their finances on the line for you.
Guarantor loans are popular amongst first home buyers, usually with their parents as their guarantors. A guarantor loan empowers a potential buyer to finally enter the market and realise their dream of finally owning a home.
Understanding the risk of a guarantor loan
Before asking your friends and family to sign on to your mortgage, it is crucial that you understand all the risks associated with this type of home loan. Your Lendstreet mortgage broker will be able to go through these with both you and your guarantor extensively. These risks include:
Cases where you default on your home loan
In these cases, your guarantor will need to pay for the entirety of your debt. When bringing on a guarantor, you must discuss ahead of time your financial status and if you are experiencing any difficulties meeting bills and other payment obligations. You need to be as transparent as how you plan to make repayments to your home loan so that they understand how they fit in the picture and how they can even guide or advise you at times. When you know you cannot make a repayment, make sure to inform them ahead of time.
Remember that apart from needing to repay the entire debt amount, defaulting on your home loan will worsen your guarantor’s credit score as well as your own, making it hard for both of you to get loans in the future.
Being a guarantor may reduce their options of getting a loan
Guarantors applying for their own home loan need to inform lenders about existing guarantor loans where they are involved. Lenders will factor this in as this means that the guarantor is already obligated to make a priority payment in case the home loan defaults which could reduce the possibility of them getting their desired loan.
Destroy or damage your relationship
Money can often come in the middle of relationships. Apart from the financial effects of defaulting on your loan, you should also consider the effects on your relationship with your guarantor if something happens. Before your guarantor signs on, you should have an in-depth conversation regarding this topic to ensure that you are both on the same page.
Benefits of a Guarantor Loan
But do not be discouraged as there are many benefits associated with this type of loan and these should be equally considered as well. With the assistance of an experienced mortgage broker, it can be a financially viable decision for you and your guarantor. Below are the benefits:
With a guarantor loan, your friends and family could help make your dreams of owning a home a reality. Still, as this is a big financial decision, having an excellent mortgage broker who can guide you through all of the risks and benefits of this choice can make all the difference both for you and for your guarantor.
To get started straight away, you can contact us at Lendstreet by filling out our online form. From there on, we will be there to help guide you through every single step of the way.
From feeling overwhelmed to knowing you're in control!
This is our simple process for equiping you towards your dream of owning a home.
Let’s get to know you, your situation, and your goals!
Find a home loan
We will search for home loans for you and advice you to choose what best suits you.
This will help you know how much you can afford so you can focus on the right properties.
Now that you have a budget can start house hunting!
Make an offer & buy!
And finally, you are here! And we’re proud of you.