Thinking of being a guarantor? Ask these three questions first about Guarantor Loans
Entering the property market is no easy feat for a first homebuyer, and it’s common for parents to want to help first homebuyers either through gifting funds for the deposit, or by acting as guarantor on guarantor loans.
Before taking the plunge however, it’s crucial to be aware of the implications involved. Here are three questions to ask yourself to see if a family guarantee is right for you.
- Am I financially fit to be a guarantor?
The first thing you should be certain of is whether you are in a financial position to pay off the loan if the borrower finds that they can no longer do so.
There can be many disruptions to an income, such as loss of employment or a serious accident, and some types of guarantor loans hold the guarantor legally accountable to ensure the mortgage is paid off.
Always get independent legal and financial advice if you’re considering being a guarantor to ensure your financial position is strong enough.
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Do the benefits outweigh the risks?
It’s no secret that it can take a long time to save for a deposit and by becoming a guarantor you offer the borrower the chance to enter the property market sooner, and in some case even avoid Lenders Mortgage Insurance.
However, any time you borrow money, or a bank places a mortgage over your property, there are things that need to be taken into account. For example, there are certain factors that can put you or your property at risk and your ability to borrow for yourself will also be reduced after offering collateral against someone else’s loan as a guarantor.
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Are there other ways I can help without being a guarantor?
If contributing to a deposit is an option, it allows you to provide a little help without needing to put yourself or your property at risk, but there are some extra hoops to jump through if a deposit includes gifted funds.
Gifted funds are not considered genuine savings by lenders. If the deposit is less than 20% of the property’s purchase price, the lender will most likely want to see five per cent of genuine savings from the borrower. Savings are considered to be genuine if they have been in the borrowers account for more than 90 Days.
Here are some crucial questions to consider when contemplating becoming a guarantor for a home loan:
1. What Are My Responsibilities under Guarantor Loans?:
Understand the extent of your financial obligations as a guarantor. Are you liable for the full loan amount or only a portion?
2. Can I Afford It?:
Assess your own financial stability. Can you comfortably cover the loan if the borrower defaults? Consider potential impact on your credit score.
3. Trust in the Borrower:
Do you trust the borrower’s ability to make payments? Assess their financial reliability and commitment to avoid potential risks.
4. Exit Strategy:
How long will your role as guarantor last? Determine the conditions under which you can be released from the guarantee.
5. Legal Implications:
Consult a legal professional to fully understand the legal ramifications and potential risks of being a guarantor.
6. Impact on Future Borrowing:
How will this affect your ability to secure your own loans in the future? Gauge the potential impact on your borrowing capacity.
7. Communication with Borrower:
Are you comfortable discussing finances with the borrower? Open communication is key to managing expectations.
8. Alternative Options:
Could the borrower obtain the loan without a guarantor? Explore other avenues to lessen the need for your involvement.
9. Financial Counseling:
Consider seeking advice from a financial advisor to evaluate the decision’s impact on your financial goals.
10. Worst-Case Scenario:
Plan for the worst-case scenario of the borrower defaulting. Can you handle the financial and emotional repercussions?
11. Exit Clause:
Establish clear exit criteria for your guarantor role, such as when the borrower reaches a certain equity threshold.
12. Documentation and Agreement:
Ensure all terms are documented and agreed upon to avoid misunderstandings later on.
Conclusion to becoming a Guarantor
Remember, becoming a guarantor is a significant commitment with potential financial and personal implications. Thoroughly assess the situation and seek professional advice before making a decision. Ask lots of questions, remember that the only silly question is the one you don’t ask but always wander what the answer is.
It’s crucial to recognize that a guarantor loan involves more than just a financial obligation; it involves trust, communication, and a shared vision of financial responsibility. As you navigate the decision-making process, remember that open dialogue with the borrower is vital. Discuss the terms, expectations, and potential challenges transparently to ensure everyone is on the same page.
A guarantor loan has the potential to shape not only the borrower’s future but also your own financial landscape. It’s a decision that may impact your creditworthiness and borrowing capacity in the future. As such, seeking professional financial advice is a prudent step. A financial advisor can help you assess the potential risks, benefits, and long-term implications of your decision, guiding you toward an informed choice.
Keep in mind the importance of having a clear exit strategy. Determine under what circumstances you can be released from the guarantor role, such as when the borrower reaches a certain level of equity. Establishing these exit criteria safeguards your interests and provides a light at the end of the tunnel.
In essence, being a guarantor for a loan, especially a guarantor loan, is a multifaceted commitment that goes beyond the financial aspects. It’s about trust, communication, and shared goals. It’s about helping someone achieve their dream of homeownership while safeguarding your own financial future. By carefully considering the implications, seeking professional advice, and fostering transparent communication, you can make a well-informed decision that benefits all parties involved in the long run.