With real estate prices rising, an increasing number of young Australians are looking for help to latch on to the property ladder. Recent research by Slater and Gordon Conveyancing Works found that more than one-third of 18-24 year olds and slightly less than one-quarter of 25-34 year olds would think about buying a home with a friend.
If you still can't get a deposit with a friend, however, it might pay to consider if getting a guarantor is the solution. Whether you're getting your first home loan or you're thinking about refinancing, it could be what makes the crucial difference.
What is a guarantor?
A guarantor is anyone who will either offer their property as as security for someone else's home loan, or agrees to pick up the slack for repayments if the borrower is unable to pay them.
With many young people feeling the pinch of soaring house prices, guarantors are becoming increasingly popular for first-time buyers. Parents are typically chosen as guarantors, having amassed equity on their home or other significant assets over the years, putting them in a more stable financial situation.
What are the benefits?
The borrower stands to benefit in a number of ways. With a guarantor, borrowers may be able to take out a home loan with a much smaller deposit, or even none at all. Other cost-saving perks include the potential waiving of lender's mortgage insurance, which can save the home buyer thousands of dollars.
What are the risks?
Unfortunately for the one going guarantor, there are significant risks to take into account. If the borrower can't meet repayments – which is a real possibility, given that the precariousness of their finances led them to seek out a guarantor in the first place – the guarantor must meet those repayments. If the borrower defaults on the loan, the debt entirely becomes the guarantor's responsibility.
Not only that, but your status as guarantor will likely negatively affect your own credit rating.
So before jumping into anything, have a serious discussion with the borrower to make sure they can service the loan.
DISCLAIMER: The information contained in this article is correct at the time of publishing and is subject to change. It is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, Smartline recommends that you consider whether it is appropriate for your circumstances. Smartline recommends that you seek independent legal, financial, and taxation advice before acting on any information in this article.