Becoming a loan guarantor

Even with housing prices in Sydney falling 5.4% over the year to August 20181, many first home buyers still struggle 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.

Do your homework before agreeing to be a guarantor.
Here are some tips to get you started:
  1. Request a copy of the loan contract and take the time to understand it.
  2. Evaluate your financial situation and that of the loan applicant who’s loan you are considering guaranteeing.
  3. Consider limiting the amount or timeframe of the guarantee. This may help reduce the risks and responsibilities involved in being a guarantor.
  4. Take time to investigate other options. Consider gifting or loaning a portion of the required deposit but be sure to consider your cashflow and the impact gifting may have on government benefits such as the age pension.
  5. Consider how a default on the loan could affect your relationship with the loan applicant.
  6. Finally, seek professional advice from your solicitor and financial planner to make sure you fully understand what is involved.

To make an appointment with an EISS Financial Planner call 1300 369 901 or visit eisuper.com.au/appointment.

1 CoreLogic, Hedonic Home Value Index, Jul 2018.