The Role of Guarantors in Loan Applications: An IDEAL guide
If you’re venturing into buying your first home amidst rising living costs and fluctuating market conditions, having someone as a guarantor on your application could be the little boost you need to secure your first property. Especially if your deposit is on the smaller side of what’s usually required. But what does having a guarantor entail, and how does it impact your loan application process?
Who is a guarantor?
A guarantor is someone who agrees to be responsible for your loan if you cannot make the repayments. Essentially, they are an added layer of security in the eyes of the lender. They're typically a close family member with a good credit history and sufficient equity in their property. Their willingness to back your loan application is a vote of confidence in your financial reliability.
What is the role of a guarantor?
The role of the guarantor is a significant responsibility. It’s a binding commitment that means should the borrower ever be unable to cover loan repayments, the guarantor agrees to take responsibility of ensuring the payments are made. Because of this guarantee, lenders may be more inclined to approve your loan, often under better conditions than might otherwise be available to you.
Key Advantages of Having a Guarantor on Your Loan
Increased borrowing power
Yes, having a guarantor can indeed boost your borrowing power. Whilst a guarantor’s income may not be used to assist in servicing the loan repayments, the additional security provided by a guarantor means lenders might allow you to borrow more than you would qualify for on your own.
Avoid Lenders Mortgage Insurance (LMI)
Perhaps one of the most appealing advantages is the potential to avoid the cost of Lenders Mortgage Insurance. LMI is usually required for loans where the deposit is less than 20% of the property's value. However, a guarantor can provide the necessary security to bypass this expense.
Does Having a Guarantor Reduce Interest Rates?
While having a guarantor can provide access to loans that might otherwise be out of reach, it may also result in a lower interest rate. Interest rates are determined by a variety of factors, including the lender's assessment of the overall risk, market conditions, and the borrower's creditworthiness. The improved loan-to-value ratio (LVR) and the increased security for the lender can put the borrower in a stronger negotiating position.
Considerations and Risks for the Guarantor and Borrower
For the borrower, there are minimal disadvantages to having a guarantor, but it’s essential to acknowledge the potential impact on your relationship with the guarantor. Financial agreements can complicate relationships, especially when someone else’s assets are at risk due to your loan defaulting. If financial difficulties arise, it could lead to tension between you and your guarantor.
Risks for the Guarantor include:
Financial Risk: The most apparent risk for guarantors is the financial responsibility they take on. If the borrower defaults, the guarantor is liable to pay back the loan, which can be a significant financial burden.
Credit Score Impact: Being a guarantor can affect your credit score. If the borrower defaults and the guarantor is unable to make payments, it can negatively impact the guarantor's credit rating.
Reduced Borrowing Capacity: As a guarantor, this commitment will be considered when applying for your own loans in the future. Lenders will take into account the potential liability, which could reduce your borrowing capacity.
It's highly recommended (and often required by lenders) for guarantors to seek independent legal and financial advice
How do I add a guarantor to my loan application?
Most typically, a guarantor will be a close family member with good credit history and sufficient equity who is willing to enter this agreement with you. The lender will assess the guarantor’s financial situation, including their credit history, income, liabilities, and assets. This is to ensure they can meet the loan obligations if the borrower fails to make repayments.
When submitting your loan application, you'll need to provide the lender with the details of your guarantor, including their consent and the necessary financial documents to assess their eligibility. If the lender approves the guarantor, all parties will need to sign a guarantor agreement. This legal document outlines the guarantor's responsibilities and the terms of the guarantee.
Streamlining the Process with a Mortgage Broker
Good mortgage brokers have a wealth of knowledge and experience in the loan application process and requirements. They can help both borrowers and guarantors understand their roles and responsibilities as well as leverage the arrangement to maximise the benefits of having a guarantor on the application.
Not all lenders have the same criteria for guarantor loans, and some may offer more favourable terms than others. A mortgage broker can help identify the lenders that are most likely to accept your application and offer competitive rates, potentially saving you a significant amount of money over the life of the loan.
Here’s where a mortgage broker can simplify your journey. IDEAL Financial Group specialises in making the guarantor process as straightforward as possible. Our expertise and lender relationships can not only secure favourable loan terms but ensure that both borrowers and guarantors are fully aware of their commitments.
Our team dives into your unique situation, offering that much-needed clarity and guidance every step of the way. We're not just about the paperwork; we're here to secure the best outcomes for you, leveraging our industry expertise and lender relationships to your advantage. Let’s make it happen.
