Becoming a Loan Guarantor

The current housing market is booming! House prices have increased by over 5% over the year to April 2021¹. The knock on effect is that many first home buyers are struggling to save the deposit amount required to secure a loan. To combat this situation, some first home buyers turn to family members (often mum and dad) for help through a loan guarantor arrangement.

What does it mean to be a guarantor?

A guarantor is someone who guarantees a loan for another person. However, the guarantor does not have the right to own the property or items bought with the money from the loan.

Guarantors may be used when the loan applicant does not have the full deposit or when the loan provider has concerns about the applicant’s ability to meet the loan repayments. In some instances, for greater assurance, a loan provider may ask the guarantor to put up an asset as security.

As a guarantor, if the lender defaults on their loan, you become legally responsible for the portion you guaranteed and if you put an asset up as security, then the loan provider may sell the asset to pay the outstanding debt.

So before you agree to be a guarantor, it’s important to understand the loan contract and know the risks. These could include:

• You may have to pay back the entire loan, plus interest, if the borrower can’t make the loan repayments. And if you can’t make the repayments the lender could repossess your home or car if it was used as security for the loan.
• If you apply for another loan in the future, you’ll have to tell the lender you’re a guarantor of another loan, and this may prevent you from securing the loan.
• You could get a bad credit report if you or the borrower can’t repay the loan, and this makes it hard for you to borrow in the future.
• If you’re a guarantor for a family member and they can’t pay back the loan, it could affect your relationship.
  
  

Do your homework before agreeing to be a guarantor

Here are some tips to get you started:

• Request a copy of the loan contract and take the time to understand it.
• Evaluate your financial situation and that of the loan applicant who’s loan you are considering guaranteeing.
• Consider limiting the amount or timeframe of the guarantee. This may help reduce the risks and responsibilities involved in being a guarantor.
• Take time to investigate other options. Consider gifting or loaning a portion of the required deposit but be sure to consider the effect on your cashflow and the impact gifting may have on government benefits such as the age pension.
• Finally, seek professional advice from your solicitor and financial planner to make sure you fully understand what is involved.

If you’d like to make an appointment with an EISS Super financial planner to discuss your options, call 1300 369 901 (option 2) or visit eisuper.com.au/appointment.

¹ CoreLogic, Hedonic Home Value Index, April 2021.