The Guarantor Home Loan (also known as Family Pledge Finance) is popular with first time home buyers. You may need a guarantor if you are considering a home loan and the lender/credit provider is concerned about the following factors:
1. You may not have saved the 20% deposit needed to buy your dream home
2. Your limited credit history, or
3. Your low income
Definition of a guarantor
A guarantor is best defined as a third party (a family member or best friend) who promises to repay a loan or other liability in the event of default.
By having a guarantor, you may be able to purchase your dream home easily. Other benefits of having a guarantor can be:
>> Some lenders/credit providers will allow you to borrow 100% of the purchase price plus 5% of the costs of your first home or investment property without showing proof of savings
>> You’ll save on Lenders Mortgage Insurance (LMI) premium
The impacts of being a guarantor
Like many people, you may believe that your responsibility as a guarantor is limited only to making sure that your family member or best friend pays the debt on time. However, as a guarantor, you are not only obligated to repay the loan amount if the borrower defaults, but the transaction may have a negative impact on your credit rating.
Have you been asked to be a guarantor for a loan?
If you have been asked to be a guarantor of a loan to support a family member or best friend, do not take the stress. Before you feel overwhelmed by the obligation to become a guarantor, you should consider what you will get from the settlement since you will be responsible for repaying the loan if the borrower defaults. Because, as guarantor:
>> You are responsible in case the borrower does not pay his loan
>> You may be required to repay the portion of the loan for which you have posted collateral, in the event of a loan default
>> You can lose your house in case of default by the borrowers
>> You can provide your owner-occupied or investment property as collateral
>> You may be required to refinance your existing loan to provide collateral to borrowers, and lenders/credit providers will be required to undergo a full assessment of your financial situation.
>> Some lenders/credit providers may not accept second mortgages as collateral for collateral.
As part of the requirements of lenders/credit providers, guarantors will be required to seek independent legal and financial advice. Therefore, contact a reputable and experienced finance brokerage firm before becoming a guarantor. He will analyze your situation and help you make the right decision.