Should you be a family guarantor?

Entering the property market is no easy feat for a first home buyer, but even parents who aren't prepared to hand over cash for a deposit may help by being a guarantor on a loan.

Before taking the plunge however, it's crucial to be aware of the implications involved.

Here are three questions to ask yourself to see if a family guarantee is right for you and your family. 

1. Am I financially fit to be a guarantor?

The very first thing you should be certain of is whether or not you are in a financially capable position to pay off the loan if the borrower finds that they can no longer do so. There can be many disruptions to an income, such as loss of employment or a serious accident and some types of guarantor loans hold the guarantor legally accountable to ensure the mortgage is paid off. 

You need to be in a strong financial position and have enough equity in your property to be a guarantor. Some lenders want to make sure the guarantor can service the full debt as well as require them to get independent legal and/or financial advice. This is to ensure you are aware of your obligations as a guarantor. 

2. Do the benefits outweigh the risks?

It's no secret that it can take a long time to save for a deposit and by becoming a guarantor, you give the borrower the chance to enter the property market sooner. Some lenders treat the loan like an 80% lend, so you avoid the costly lender's mortgage insurance (LMI). Having a guarantee also means that the borrower doesn't have to save up for a full deposit for the purchase, or sometimes any deposit at all. 

However, any time you borrow money or a bank places a mortgage over your property, there are things that need to be taken into account. While in some instances it's recommended, in other instances it may put you and your property at risk. Your ability to borrow will also be reduced after becoming a guarantor.

3. Are there other ways I can help without being a guarantor?

If contributing to a deposit is an option, it allows you to help a little without needing to put yourself or your property at risk. However, there may be some extra hoops you need to jump through if gifting funds. 

If you would like more information about how a guarantee loan would work for your family, contact Edge Lending Solutions in Toowoomba!

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