Guarantor loan

A guarantor is someone who’s willing to use their real property as security to guarantee they’ll be responsible for repayments if the borrower can’t make those repayments for any reason. Usually, guarantors are family members who want to help their family get underway with buying a property but will want this to be a short-term solution—certainly not for the life of the loan—while the property’s value increases and therefore generates equity in the loan.

For a guarantor to be eligible, they need sufficient equity in their mortgage. Lenders use this to assess if the guarantor can make repayments easily (through a liquidity calculation) if the borrower defaults for a certain period.

How guarantor loans work

To protect and respect the borrower-guarantor relationship, you must get advice on whether the numbers work if the worst-case scenario happens (i.e. borrower defaults) and other economic factors. The guarantor needs to also consider their plans for their property and future lending. They’re essentially giving up some of their leverage by supporting their family by being guarantor.

Equity

Using equity in your current home loan is great point of leverage and advantage. It takes time to save money for a deposit but it’s going to take longer when committed to existing repayments. And taking on an investment property has clear tax advantages. However, you must assess if these advantages will be offset by borrowing 100% on a new property without a deposit, as repayments will be higher.

The Get Real Finance team helps you to make informed decisions about the short-term and long-term impacts.