A suitable guarantor can help a prospective borrower to get into the property market sooner. Typically the guarantor will offer some suitable reassurance that loans will be repaid. This reassurance is in most cases given by offering a tangible form of security to support the loan application.
While a guarantor can help provide a quicker path to the housing market, there are still some obstacles to overcome when applying for a loan. Financial institutions will not lend on the strength of the guarantee alone and you will need to be mindful of the following factors when considering using a guarantor.
- Serviceability will be a major factor that the financial institution will base their decision on. When things go wrong with guarantees, the financial institution is often placed in the unenviable situation of taking legal action against two parties. They, therefore, have very strict assessment criteria when assessing loans with guarantors. There needs to be no doubt that the borrowers are capable of servicing the debt today and for the term of the loan.
- Savings. This requirement will vary from lender to lender, but the lender will want to see some capacity on the part of the borrower to save. Some institutions may consider rent payments as proof of savings ability. Others will want to see money in the bank.
- The guarantor needs to be entering into the agreement with a full understanding of the commitment that they are making. Furthermore, the financial institution will need to satisfy themselves that the guarantor is entering into the agreement without being coerced into doing so. The guarantor will be provided with all necessary documentation, loan agreements and statements of their rights and responsibilities in clear English. Guarantors will always be encouraged to seek independent legal advice.
If you think that a guarantor could help your application for finance, give the team at Australian Finance Hub a call to discuss your options. We will be happy to talk you through the loan and guarantee process.