5 Tips For Guarantors on Home Loans
With property prices in Australian cities continuing to rise out of reach for first home buyers and first-time investors, using a guarantor to secure a home loan has become a popular route to entering the property market.
A guarantor is someone who will offer the lender the equity in their own property as additional security for someone else’s home loan. In most instances, this will be a parent assisting an adult child to buy their first home.
1. Beware the risks
While going guarantor on your son or daughter’s home loan is a wonderful way to help them get into the property market, be aware that there are serious risks attached. Signing that guarantee means that you are legally bound to pay the entire loan off if your family member defaults on the repayments or cannot pay the loan out in full for any other reason.
The repercussions can be severe for the guarantor if the borrower defaults on their loan, including the possibility of having to sell your own home to service or clear the debt.
Before agreeing to go guarantor, you need to be sure your child will be able to service the loan now and well into the future. This is where ALI loan protection insurance steps in. Pending meeting the eligibility requirements, either you, as the guarantor, or your child, as the borrower, can be covered by an ALI Group Loan Protection Plan.
2. Seek independent advice
Even though you are dealing with family, going guarantor should be treated as a business agreement. Before signing, seek legal and financial advice to ensure you fully understand this commitment.
3. Be aware of the effect on your ability to get credit
If, during the life of the loan you have agreed to guarantee, and you are in need of credit, the credit provider will include the guarantor loan as a liability when assessing your application. This may mean you cannot get a loan yourself if and when you may need one.
4. Go co-guarantor
To reduce your risk as a guarantor you do not necessarily need to commit to the entire loan. Some lenders will allow you to go co-guarantor with your child so you only need to guarantee a portion of the loan. For example, if you limit the guaranteed amount to 20 percent of the purchase price of a property this will cover the loan’s deposit and help your child to avoid the additional costs of Lender’s Mortgage Insurance (which applies on loans greater than 80 percent of the value of the property).
5. Know when to seek release
Once your child has built up sufficient equity in their property, you can ask to be released as guarantor for the loan. A fee may apply for release, along with the cost for the lender to revalue the property which will remain as the sole security property on the loan.
ALI Group provides one policy with three types of benefits:
- Involuntary unemployment occurring during the first five years of the policy
- 11 serious medical conditions such as cancer, stroke and heart attack
- Death and terminal illness
You can add Accidental Injury cover as an optional extra.
Keep in mind that 48% of all ALI Group claims paid in the 2015/16 financial year were for people aged 40 and under. With an ALI Group Loan Protection Plan, you can help ensure you’re not left in a difficult position.
By reducing your risks and protecting yourself and your child with an ALI Group Loan Protection Plan you can be more confident about going ahead with a guarantor loan. While most plans pay the lender, Loan Protection Plan benefits are paid directly to the claimant. This can allow you, or your child, to use the payout for purposes such as covering large debts or urgent medical bills if needed. There are no medicals, flexible payment options and all jobs and hobbies are covered.