By looka_production_110154028
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May 16, 2024
For many Aussies, obtaining a loan can sometimes be a challenging task, especially for first home buyers starting out on the property ladder. With much of the nation’s wealth held up in real estate, guarantor loans continue to be a very popular avenue for borrowers - in fact, guarantor loans more than doubled in 2023, compared to jumping from 1.8% to 5%*. Another 2023 study by mortgage brokers revealed an increase of 71% in guarantor loans over the past six years, making the "Bank of Mum and Dad" the 9th largest lender in the country, financing approximately $35 billion worth of loans*. The increase in guarantor loans reflects a broader shift in the borrowing habits of Australians, as individuals seek out innovative solutions to meet their financial needs. With housing prices remaining high and the cost of living continuing to rise, guarantor loans provide a lifeline for many Australians striving to achieve their financial goals. Understanding Guarantor Loans So, what is a guarantor loan exactly? In a guarantor loan arrangement, the borrower applies for a loan with the support of a guarantor. The lender assesses both the borrower's and the guarantor's financial circumstances to determine the risk involved. Chris Brown, Mortgage Broker and owner of CMB Finance explains. “Guarantor loans essentially involve a third party - typically the parents, pledging their equity as security for the borrower's loan.” “A guarantor loan can have a number of benefits from increasing your borrowing ability, increasing your deposit in order to eliminate lenders mortgage insurance or helping with additional costs associated with buying a property.” “Lender’s mortgage insurance alone can cost borrowers thousands or even tens of thousands of dollars, which is why it’s a cost many borrowers do their best to avoid. And when you add in other home buying costs like stamp duty, conveyancer fees as well as home insurance, purchasing a first home is not easy.” Risks with guarantor loans Although having a parent or family member as a guarantor is great for young borrowers, it can be risky for the guarantor. When a guarantor loan is approved, the borrower receives the loan, and the guarantor assumes the responsibility to make repayments if the borrower defaults – therefore it’s crucial for both parties to understand the terms and obligations outlined in the loan agreement before proceeding. Chris Brown continues, “One of the main risks is that if the borrower can’t make the monthly mortgage repayments, the guarantor can be liable for the portion of the home loan they guaranteed.” “If they default on the mortgage, the lender will often sell their home to discharge the mortgage. But if there’s a shortfall – especially if the borrower had negative equity – it may be the guarantor's home on the chopping block next.” “This is a considerable financial risk, so you should think long and hard before agreeing to go guarantor for your kids. Ask yourself honestly whether you trust your children to be financially responsible, and make sure you’re in a position where your savings can comfortably cover any problems that come up.” Showing Savings with guarantor loans Even with a guarantor, some lenders may require you to show that you have been saving money, usually at least 5% of the purchase price. This is known as genuine savings and demonstrates to the lender that you can manage your finances and make regular loan repayments. “Even with a guarantor it is still integral to have a proportion of regular savings usually three months or more”, said Chris Brown. “This provides evidence to the guarantor and the lender that you as the borrower can genuinely pay the loan and are ready for unexpected financial costs - from interest rate rises to cost-of-living pressures and even maintenance of the home. At the end of the day, whilst we all want to help Aussies get that property dream, we also don’t want someone to default on their loan.” Next Steps As you can see, whilst beneficial for borrowers there, are a number of complex and stringent criteria to consider and understand before pursuing a guarantor loan. While they provide a pathway to access credit and improve financial standing, they also entail significant responsibilities and risks for both borrowers and guarantors. Before pursuing a guarantor loan, it's crucial for all parties involved to carefully consider the implications, seek professional legal advice, and ensure they are fully informed about their rights and obligations under the loan agreement. At CMB Finance we have helped many families understand the guarantor loan process. Drop us a line so we can help you today.