Becoming a guarantor for a loved one’s home loan can be a meaningful way to help them achieve their dream of home ownership. However, it’s a significant financial responsibility that requires careful consideration.
To help you prepare, we’ve put together a guide covering everything you need to know about being a guarantor, from eligibility and responsibilities to financial planning and how to exit the role when the time comes.
At Horizon Bank, we’re committed to ensuring that both borrowers and guarantors can make informed decisions, backed by local support and expertise.
Who Can Be a Guarantor?
A guarantor is someone who agrees to provide security for part or all of a borrower’s home loan, helping the borrower secure a property or access better loan terms. But who qualifies as a guarantor?
Eligibility Criteria
Guarantors are typically individuals with a stable financial history. This often includes:
- Having a steady income or sufficient assets.
- Owning property (outright or with an existing mortgage).
- Possessing good credit.
Lenders will assess your overall financial standing to ensure you can act as a guarantor without putting yourself at financial risk.
Common Relationships
Most guarantors are family members or close relatives. Parents frequently act as guarantors for their children to help them get onto the property ladder. Occasionally, other trusted individuals, like extended family, can also step in, provided they meet the eligibility criteria.
Financial Considerations Before Saying Yes
Becoming a guarantor is a big decision, and evaluating your financial situation is essential before agreeing to help. While your intentions may be to support a loved one, it’s important to ensure that the role won’t strain your finances.
Assess Your Financial Stability
Before agreeing to anything, take an honest look at your financial picture:
- Do you have existing debts, such as a mortgage, personal loan, or credit card obligations?
- Can you comfortably handle potential financial pressure if the borrower faces difficulties repaying the loan?
- How might becoming a guarantor affect your ability to secure credit in the future?
Potential Impact on Your Borrowing Power
Be prepared for the possibility that being a guarantor could impact your eligibility to take on new loans or financial commitments of your own. Lenders often consider a guarantor’s obligations part of their overall financial responsibilities, even if the loan doesn’t directly affect your finances.
Understanding Your Responsibilities as a Guarantor
While being a guarantor can be rewarding to help someone you care about, it’s important to understand exactly what you’re agreeing to. Clear expectations upfront can help avoid misunderstandings down the road.
Guaranteeing the Loan
When you act as a guarantor, you’re offering security to the lender to reduce their risk. This will involve:
- Using your property as security.
- Agreeing to guarantee a portion of the loan amount.
It’s crucial to understand that you won’t be making regular payments on the borrower’s loan. However, you will need to step in and cover missed payments if the borrower defaults entirely.
Managing Risks
Before signing any agreements, it’s a good idea to:
- Seek independent legal or financial advice to fully understand the terms.
- Discuss repayment plans and contingencies with the borrower to ensure everyone is on the same page.
How to Exit Your Role as a Guarantor
Many potential guarantors worry about being locked into this role indefinitely. Fortunately, there are clear pathways to exiting the guarantor role once the borrower has reached certain milestones.
Conditions for Being Released
Most lenders release guarantors from their obligations once the borrower reaches an 80% loan-to-value ratio (LVR). This means the borrower has repaid enough of their loan or the property has gained sufficient value to reduce the lender’s risk.
Steps to Exit
Once the conditions are met, you can formally apply to be removed as a guarantor. You may need to provide a request to the lender for a release of the guarantee.
Lenders usually handle these requests efficiently, but it’s worth staying in touch with the borrower and regularly monitoring their progress.
Supporting a Loved One with Confidence
Becoming a guarantor is a tangible way to help someone you care about achieve their dream of home ownership. However, entering the arrangement with a full understanding of your responsibilities and the potential financial implications is essential. By planning ahead and seeking experts' support, you can confidently fulfil this role.
Talk to Horizon Bank
Are you thinking about becoming a guarantor? The team at Horizon Bank is here to help. We’re committed to providing clear, personalised guidance to both borrowers and guarantors, ensuring everyone feels supported and informed throughout the process.
Visit us at your nearest local branch at Albion Park, Bega, Bermagui, Berry, Merimbula Moruya, Nowra, Thirroul, Ulladulla or Wollongong or contact us online. Together, we can help you take the next step with confidence.
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.
