Guarantor Myths Busted – What You Need to Know
When considering a home loan, especially for first-time buyers, the idea of using a guarantor often comes up. A guarantor can play a significant role in helping you secure a loan, but there are plenty of misconceptions out there about what being a guarantor entails.
To clear things up, we’re debunking some of the most common myths, so you can make informed decisions about guarantor-backed loans. At Horizon Bank, we’re here to guide you through every step of your home loan journey, ensuring clarity and confidence in your decisions.
Myth #1 - Guarantors Must Make Regular Loan Payments
One of the most widespread misconceptions is that guarantors are required to make regular payments towards the loan. This is not the case. The primary responsibility for loan repayments always lies with the borrower.
The guarantor, however, does step in as a safety net. If, and only if, the borrower is unable to make payments, the guarantor may be required to cover the outstanding amount. It’s worth noting that this is often a last-resort scenario once all payment recovery options have been explored. Guarantors aren't required to contribute to monthly repayments as a matter of course.
How This Works in Practice
For instance, if you’re a parent acting as a guarantor for your child’s first home loan, you won’t be paying anything unless something unexpected happens. This safety net reassures the lender but doesn’t interfere with your own financial routine.
Myth #2 - Guarantors Are Tied to the Loan Forever
Many people believe that once you sign as a guarantor, you’re locked in for the entire duration of the loan. This is another myth. While it’s true that you do take on a commitment, it’s not necessarily a lifetime one.
Guarantors can be released from their obligations under certain conditions. A common example is when the borrower reduces their loan-to-value ratio (LVR) to 80% or less. Once the borrower has built enough equity in the property, the guarantor can apply to be removed from the arrangement.
At Horizon Bank, we advise guarantors to establish clear terms upfront and communicate with the borrower about progress on the loan.
Myth #3 - You Can’t Act as a Guarantor If You Have a Mortgage
Another misconception is that having an existing mortgage disqualifies you from becoming a guarantor. This isn’t correct. While lenders do assess a guarantor's overall financial position, having a mortgage doesn’t automatically rule you out.
Lenders will evaluate your income, current debts, and overall financial stability to determine eligibility. If your finances are in good shape, you can still act as a guarantor - even if you’re currently repaying your own home loan.
An Example in Action
Say you own a home and still have a mortgage, but your financial commitments are manageable. You may still be able to guarantee part of your child’s home loan, helping them reduce costs without compromising your existing obligations.
Myth #4 - Guarantors Only Cover the Cost of LMI
Some believe that guarantors are only required to step in for Lender’s Mortgage Insurance (LMI), which protects the lender if the borrower defaults. While guarantors can indeed help borrowers save on LMI by reducing the LVR, their role doesn't stop there.
Guarantors effectively provide the security a borrower might lack. This means guaranteeing a portion of the loan amount instead of simply covering LMI fees. Their involvement often helps borrowers access better loan terms or secure a property sooner.
At Horizon Bank, we often see guarantor-backed loans as a practical way to support loved ones without handing over any cash payments.
Why Understanding Guarantor Roles Matters
Understanding what being a guarantor involves ensures that both the borrower and guarantor enter the arrangement with clarity and confidence. A guarantor-backed loan can make home ownership more achievable for many Australians, but it’s vital for everyone involved to know their rights and responsibilities upfront.
Talk to Horizon Bank Experts
Still have questions about guarantor-backed loans? At Horizon Bank, we’re here to help. Our friendly team can guide you through the details, provide personalised advice, and help you explore the best home loan option for you.
Visit your nearest local branch or contact us today to learn more about how we can support your home loan goals. Together, we can make your dream of home ownership a reality. Horizon Bank has a branch network spanning the NSW South Coast and Illawarra. Horizon Bank branch locations: Albion Park, Bega, Bermagui, Berry, Merimbula, Moruya, Nowra, Thirroul, Ulladulla & Wollongong.
If you'd like more information, explore our FAQs or take advantage of our home loan options. We’re here to help you every step of the way.
The content in this article has been prepared by Horizon Bank for general information only and it is not intended to be professional advice. It does not take into account your objectives, financial situation or needs. You should seek your own legal, accounting, financial or other professional advice where appropriate, and consider the relevant General Terms and Conditions before deciding whether to acquire any products or services offered by Horizon Bank and/or its affiliated partners. We do not recommend any third party products or services referred to in this article unless otherwise stated and we are not liable in relation to them. Any links to third party websites are for your information and we do not endorse any content on those sites. Horizon Credit Union Ltd ABN 66 087 650 173 AFSL and Australian Credit Licence Number 240573 trading as Horizon Bank.
