Guarantor Loans – Risks and Benefits

. 3 min read

For those of you who could not afford to pay the entire deposit on your mortgage and/or if you wish to borrow greater amounts without having to pay for mortgage insurance, great news, guarantor loans are just for you. Under this loan, banks are willing to lend as much as 110% above the property value with competitive rates and without the requirement of Lenders Mortgage Insurance.

So what’s the catch? Well, you will be exposing someone else’s assets and property in the event of your default. That other person is known as the guarantor.

Therefore, are guarantor loans something you should really enter into? In this segment, we aim to clarify the benefits and risks of entering into guarantor loans as well as the considerations to take should you decide to be a guarantor.

Want to know more about the different types of loans? Check out our previous segment that compares different loan types.

Types of Guarantor Loans

To begin, there are two different types of guarantor loans: secured and unsecured. Secured guarantee loans offer a bit more protection to the guarantor in that it is already secured against the borrower's existing asset. Hence, this gives the guarantor a bit of leeway as banks will pursue that asset first before going for the guarantors. Unsecured guarantee loans, on the other hand, are much riskier. it is not secured against any asset of the borrower. Hence, in the event of borrower default, banks will automatically seize the guarantor’s assets.

Benefits of Guarantor Loans

The main obvious benefit of the guarantor loan is that it lowers the cost of entry. Borrowers could borrow the full amount of the loan without having to pay for lenders mortgage insurance. On top of that, it is quite typical of guarantor loans to have very competitive interest rates. Such a low cost of entry stems from the fact that banks view guarantor loans as extremely low risk.

The second benefit is that with guarantor loans, you may even be able to borrow more than the value of your home. Of course, this depends on the lender and what the purpose of the loan is:

  • First home buyer: 105% of the property value
  • Construction: 105% of property value
  • Debt Consolidation and Purchase: 110% of the property value
  • Investment: 105% of the investment property value
  • Refinancing: 100% of the property value

Another benefit is that if the guarantor can choose to limit the size of the guarantee in order to minimise risk. This means that they would only be liable for a certain portion of the loan, above which the lender assumes the risk. This allows flexibility and reduces strain for the guarantor.

Risks of Guarantor Loans

The main risk of guarantor loans is that any default on part of the borrower would lead to banks taking possession of the guarantor’s property. The guarantor does not have the right to demand that banks try to obtain payment from the borrower or to seize the borrower’s assets first - banks have ultimate discretion. In most cases, however, banks will take action against the borrower assets first before pursuing the guarantor.

So you want to be a guarantor?

Being a guarantor has greater obligations than one might think, so it is prudent to understand all the conditions first before entering into any arrangement. In fact, the law guarantees your understanding by requiring you as a potential guarantor to obtain a solicitor’s certificate. This certificate essentially is proof that you understand the conditions and prevents you from relying on the lack of understanding as a means to escape your contractual obligations.

Apart from understanding the contractual conditions, you should also evaluate:

  • Your relationship with the borrower
  • The extent of your liability in the event of default
  • Whether you can realistically afford to be a guarantor
  • Whether the borrower can really afford the loan

In need of a more competitive mortgage rate? In the LoanDolphin marketplace, lenders now bid to give you the best loan. Call a LoanDolphin representative now on 1800 855 919 for a quick chat.