If you’re applying for a loan and the lender wants additional security, they might recommend a guarantor loan. A guarantor is a person who agrees to become legally liable for your loan repayments if you don’t make them.
Why would a lender require a guarantor?
A lender might ask you for a guarantor if you don’t have:
- a good (or any) credit score.
- enough deposit to meet your lender’s loan approval requirements. For example, a lender may require you to have a 20% deposit for a home loan.
Most lenders will only allow family members under the age of 65 to be your guarantor.
How do guarantor loans work?
Guarantors typically provide lenders with a mortgage over their property as extra security for a borrower’s loan. It’s important to understand that a guarantor doesn’t necessarily need to be in place for the duration of a loan.
For example, let’s imagine your parents agree to go guarantor for your first home loan. The arrangement should only need to be in place until the amount owing falls to an acceptable loan-to-value ratio (LVR) for the lender. An LVR is the amount borrowed/owing expressed as a percentage of the value of the property.
There are two ways that you can lower your LVR over time on a home loan:
1) by making loan repayments, and
2) by your property increasing in value over time.
What are the pros and cons of guarantor loans?
Guarantor loans have pros and cons. It’s important to understand them before you take out a guarantor loan.
Advantages of guarantor loans
A guarantor can help you to:
- get a loan approval that you wouldn’t otherwise get.
- borrow more.
- avoid the cost of lender’s mortgage insurance (LMI). LMI protects your lender if you don’t make your repayments. Many lenders will charge LMI if your LVR is less than 80% and you don’t have a guarantor. The cost of LMI varies depending on the size of the loan, but it can be $10,000 or more on a typical Australian home loan.
Disadvantages of guarantor loans
- will have their borrowing capacity reduced while the guarantor arrangement is in place
- will become legally liable for your debt if you don’t make your repayments.
- might have their property seized by a lender to recover your outstanding debt.
- will have their credit rating negatively affected if they cannot repay your debt. In a worst-case scenario, they could even face bankruptcy.
How we can help
At Wisebuy Investment Group in Newcastle, our experienced and licensed brokers can help you to find the right loan for your needs, including guarantor loans. We can also help you with your application and ensure that your guarantor arrangement isn’t in place for any longer than it needs to be.
Contact us today for an obligation-free chat! We’ll take the time to understand your individual needs before providing you with appropriate advice. Our focus will be on finding the right loan for your needs from over 60 Australian lenders.
And best of all, our service is free!