Thinking of being a guarantor? Ask these three questions first

Published by MFAA

Entering the property market is no easy feat for a first homebuyer, and it’s common for parents to help first homebuyers either through gifting funds for the deposit, or by acting as guarantor on the loan.

However, before taking the plunge 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:

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 financial 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.

It’s always advisable to get independent legal or financial advice if you’re considering being a guarantor to ensure your financial position is strong enough.

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 offer the borrower the chance to enter the property market sooner, and in some cases avoid lenders mortgage insurance.

However, any time you borrow money or a bank places a mortgage over your property, there are definitely things that need to be taken into account. For example, there are certain factors that can put you or your property at risk and your ability to borrow for yourself will also be reduced if you are acting as guarantor on a loan for someone else.

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

If contributing to a deposit is an option, it allows you to provide help without needing to put yourself or your property at risk, but there are some extra hoops to jump through if a deposit includes gifted funds.

Gifted funds are not considered genuine savings by lenders. If the deposit is less than 20%, the lender will most likely want to see 5% genuine savings from the borrower. There are a few lenders that will allow you to use rent as genuine savings. So, if you’ve been renting for a while, it shows that you have the propensity to make repayments and then the reduced (less than 20%) deposit may be used in that regard.

MFAA accredited finance brokers can provide access to tailored loan products and expert knowledge, and meet the highest educational and ethical standards. Contact an MFAA accredited broker today.