RESPONSIBILITIES OF A GUARANTOR
Saving a deposit can be daunting and very hard to do when you’re also paying rent. It takes the average couple nearly five years to save a deposit, and almost half end up needing help from family. In the meantime, house prices just keep going up.
If you don’t yet have a deposit but want to get into the property market – One way to borrow without having any savings, is by using a guarantor (normally a family member or parents). With the help of a guarantor you can borrow 100% of the purchase price plus the money needed for stamp duty and any other associated costs. Essentially, a guarantor provides a guarantee, secured on their property. If the person they have guaranteed for, fails to meet their loan obligations and defaults, the guarantor will be responsible for the amount they have guaranteed.
Guarantor loans have become very common these days as they cost less than standard home loans, they allow you to buy without a deposit and some lenders now allow you to limit the size of the guarantee. Another benefit of having a guarantor is that you may save thousands of dollars by avoiding Lenders Mortgage Insurance (LMI). Generally LMI is required for home loans where you have less than 20% deposit i.e. the loan is greater than 80% of the value of the property. LMI is a type of insurance which lenders take out to cover the additional risk of high Loan to Value Ratio (LVR) lending. Although this insurance covers the lender against the risk of you defaulting on your loan, you pay the premium.
The amount of the guarantee depends on the individual lender’s policies. The guarantee can vary from the full loan amount to as little as 20% of the loan (where the loan is for 100% of the purchase price).
After you’ve built up equity in your property, your guarantor can ask to be released from the loan. The timeframe to achieve this varies depending on the original deposit, the number of extra repayments made and whether your property has appreciated in value over the time period.
Depending on the lender, you may be required to pay some additional fees to release your guarantor. This can include a fee for the lender to revalue the primary security property as well as lender discharge fees.
Anyone who is considering being a guarantor for a property loan should seek independent legal and financial advice before accepting the role. Most lenders will insist on this, prior to accepting a guarantee. Both parties should fully understanding the roles and responsibilities of a guarantor to help minimise risk.
What are the responsibilities of the guarantor?
Essentially, you become liable to pay if the borrower defaults on their repayments. This means that the creditor may, once the borrower has defaulted, require the full repayment of all the money that still owed on the loan agreement. It is not uncommon for the creditor to take legal action and sue you directly as the guarantor (because you have the money/asset). Once you are sued, you may have a claim against the borrower as a separate cause of action.
What if the borrower is unable to pay back the loan?
If the borrower is unable to pay back the loan according to the terms of your contract, the lender can take legal action against the borrower, and in some circumstances, guarantor. Guarantor will be liable for the amount specified in the guarantee.
What are the guarantor’s obligations?
If the borrower is unable to meet the loan repayments and defaults, the guarantor will be required to pay the amount owed, which might encompass significant arrears of interest.
Can a guarantor avoid paying?
While there have been cases in the past which involved the guarantor showing to the court that they did not fully understand what they were doing at the time they entered into the loan agreement as guarantor, guarantors will usually be made to pay on behalf of the debtor.
For an honest and unbiased opinion, talk to Think and Grow Finance today on 03 8390 5855 or email mitesh@thinkandgrowfinance.com.au