The Home Equity Loan (also known as Family Pledge Finance) is popular with first-time home buyers. You may need a guarantor if you are considering applying for 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 a best friend) who promises to provide a loan payment or any other liability in the event of default.
By having a guarantor, you may be able to buy 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 the need for proof of savings
>> You will save on your Lender Mortgage Insurance (LMI) premium
The impacts of being a guarantor
Like many people, you may believe that your responsibility to be 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 can have a negative impact on your credit rating.
Have you been asked to be the guarantor of a loan?
If you’ve been asked to be the guarantor of a loan to support a family member or best friend, don’t worry. 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 paying the loan if the borrower defaults on the loan. Because, as guarantor:
>> You are responsible in case the borrower defaults on your loan
>> You may be required to repay the portion of the loan for which you have provided collateral, in the event of loan default.
>> You can lose your home in the event of borrowers default
>> You can provide an owner-occupied property or an investment property as collateral
>> You may need to refinance your existing loan to provide collateral to borrowers, and lenders / credit providers will need to undergo a full assessment of your financial situation
>> Some lenders / credit providers may not accept second mortgages as collateral.
As part of the requirements of the lenders / credit providers, guarantors will be asked to seek independent legal and financial advice. Therefore, contact a reputable and experienced finance brokerage firm before becoming a guarantor. They will analyze your situation and help you make the right decision.