Information that every Guarantor needs to know

Guarantor information page 

Becoming a guarantor is a significant responsibility, and it's crucial that you have all the information you need to make an informed decision. It's important to ask questions and understand the applicant's financial situation before agreeing to become a guarantor.

To help you assess the situation, we will consider the applicant's overall financial position, including their income stability, credit history, and existing financial commitments. Your mortgage broker can guide you through this process and help you understand the risks involved.

We will also work to ensure the applicant has a strong chance of approval before submitting any loan applications. We identify the most suitable lender for the applicant's needs, ensuring the loan can be repaid as soon as possible, and releasing you from your guarantor obligations as soon as possible. 

We only use a limited guaranteed type loan, so when the applicants own 20% of the property’s value, you can be released. You do not need to be there for the entire loan duration

It's important to remember that different lenders have varying policies, fees, and charges for guarantor loans. A thorough analysis is essential to determine the most appropriate lender for the applicant.

Our services for non-commercial loans are free of charge, so please don't hesitate to contact your mortgage broker to discuss any concerns you may have about becoming a guarantor.

‍

What are the risks if I will be a guarantor?

We have outlined some of the basic risks involved with guarantor loans below. However, it's important to note that a comprehensive assessment of the risks requires a thorough understanding of both the applicant's and the guarantor's circumstances.

The primary risk you face as a guarantor is that if the applicant defaults on their loan repayments, you may become liable for any residual debt.

We created this Guarantor Information Page to help you identify potential risks that may not be covered in the lender's standard approval process.

To illustrate the potential risks more clearly, let's break it down with an example.

‍

When a loan is not getting paid. What happens?

here's a breakdown of the typical process:

Firstly, the lender will attempt to work with the borrowers to get their repayments back on track. They often offer hardship solutions, such as a temporary pause on repayments, to help the borrowers during difficult times.

However, if the situation doesn't improve and the lender takes legal action, the bank may eventually be able to take possession of the borrower's home and sell it.

Ideally, the property would sell for close to or even more than the price paid for the property. The bank would then use the sale proceeds to repay the mortgage loan and any associated fees, including the selling agent's fees. 

In many cases, this means the debt is repaid in full, and the guarantor is automatically released. If there's any money left over from the sale, it would go to the applicants.

Please keep in mind that this is just an example, and every loan scenario is different. It's crucial to discuss any specific situation with a mortgage broker before making plans to become a guarantor.

There is no risk to the guarantor if the loan repayments are made on time. Otherwise, banks wouldn't offer this facility.

Most of the risk lies in what might happen in the future, which is impossible to predict with certainty.

‍

Important points to remember:

Shortfalls are the main concern regarding any guarantor loan that may end up in arrears. In the event a lender needed to sell the applicants property, any shortfall from the sale needs to be repaid also.

If the applicant is contributing an initial deposit, and the loan amount was therefore less than the purchase price of the property, there is minimal risk to the guarantor. The applicant's cash deposit acts as a buffer, reducing the likelihood of a shortfall if the property needed to be sold.

On the other hand, if the applicant borrowed equal to or more than the property value, the risk increases. If a home was sold for $700,000 and the loan was $720,000, then there will be a residual debt of $20,000. Add selling agents’ fees etc to this as well, as the lender would add all selling fees to the outstanding loan balance.    
‍

Certain elements need to be considered that may improve the situation:

• Did the applicants have a deposit of 5% or 10%?
• How long have the applicant had the loan? If it's been several years, the loan balance could be significantly lower than the original amount.
• Have the applicants made higher repayments on the home loan since they bought the property? 
• Has there been an increase in the property's value since it was purchased?
  

As you can see, numerous factors can influence the risk associated with guarantor loans. Therefore, it is important to discuss the merits of this type of loan with a professional mortgage broker who can assess the applicant's situation and provide informed recommendations to all parties.

In our opinion, these loans are only risky when the right questions haven't been asked before a loan is obtained.

‍

Family knows family:

As a parent, you have a deeper understanding of the applicant than a broker ever could. If you notice any "red flags" about the applicant's financial situation, it's crucial to discuss them with your broker before applying for a loan. It is too late once the loan has settled. 

A few basic issues to consider are listed below:

• Are there challenges at work? If there is even a slight chance an income could be at risk, it's important to raise this concern with your broker beforehand. 
• Are the applicants struggling to save money or cover their living expenses? If so, will a mortgage payment be too much for them to manage?
• Are there plans for children in the near future? Has this been considered as a cost or potential loss of income?
  

Please remember that we also conduct our own thorough assessment and can usually identify potential risks. 

Through the credit check performed by lenders during the loan application process, we will see if the applicant has store cards, credit cards, or other existing loans that may affect their loan viability.

‍

Building insurance: One of the most important items to discuss:

Firstly, Illawarra Mortgage Brokers do not provide insurance to our clients. It is the client’s obligation to obtain adequate insurance for their needs.

However, we feel It is of critical importance to mention that the applicant maintains adequate building insurance on their home throughout the duration of the loan and beyond.

If the home were to suffer a catastrophic event such as a fire, the property value would significantly decrease. This would leave you with a substantial loan on a block of land that is worth considerably less than it was with a home on it.

The primary concern here, is that if the house was uninsured, there would likely be no funds available from the lender to rebuild. 

The full existing loan would still be in effect, and the bank would expect repayments according to the original contract. In this situation, the applicants would likely be displaced and paying rent elsewhere.

Further borrowing would not be feasible in many cases, and payments on the original loan would still need to continue. Even selling the now vacant land would be unlikely to clear the debt.

Please do not underestimate the importance of ensuring that your property remains insured at all times. It is a crucial safeguard for all concerned.

‍

Pressure to be a guarantor:

Addressing the topic of being pressured to become a guarantor: 

It is important to emphasize that you should never feel pressured by loan applicants or mortgage brokers to take on this role.

Becoming a guarantor is a significant financial commitment, and it may be several years before you could be released from this obligation. This typically occurs once the loan balance reaches 80% of the property value. 

To help you decide if becoming a guarantor is a suitable option for you, we will ask you a series of questions to assess the overall situation and any associated risks.

It is also important for the loan applicants to understand that they are asking for your assistance, and your right to decline their request should be respected.

‍

How can I apply?

• You can apply for a loan by contacting us at 02 4257 5626 to speak to a mortgage broker, or by completing online enquiry form. We're committed to providing a friendly and professional service. Our team has been assisting clients with home loans since 1998.
• It's important to us that we find the right home loan for your unique situation. To do this effectively, we'll need to gather some information about your circumstances during our initial conversation. This will help us determine the most suitable options for you.
• Our broker will discuss your requirements and concerns to understand your needs fully. They will also offer potential strategies and ideas for your consideration.
• Based on your needs, we will provide a proposal with a few easy to understand options. After discussing the proposal and its suitability, you can then decide whether to proceed with a loan application or explore additional options.
• All information you share will remain completely confidential, regardless of whether you decide to apply for finance.
  ‍