Is a family guarantee right for you?

Entering the property market is no easy feat for a first homebuyer, but even parents who aren’t prepared to hand over cash for a deposit may help by being a guarantor on a loan. Before taking the plunge however, 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 financially capable 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.

“You need to be in a strong financial position and have enough equity in your property to be a guarantor,” says a finance broker, “Some banks even want to make sure that the guarantor can service the full debt as well, so it’s always advisable to get independent legal or financial advice if you’re considering it.”

  1. 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.

“Lenders may treat the loan like an 80 per cent lend, so you avoid the costly lender’s mortgage insurance,” the broker advises, “You also don’t have to save up for a full deposit for the purchase, or sometimes any deposit at all.”

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, the broker explains. “While in some instances I would recommend it, it’s definitely not a first option as there are certain factors that can put you or your property at risk. Your ability to borrow will also be reduced after using a guarantor.”

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

If contributing to a deposit is an option, it allows you a little 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.

“With gifted funds, if [the deposit is] less than 20 per cent of the property’s purchase price, then the banks will most likely want to see five per cent of genuine savings,” the broker explains, “Having said that, 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 per cent) deposit may be used in that regard.”

Mortgage and Finance Association of Australia (MFAA) accredited finance brokers can provide access to tailored loan products and expert knowledge, and meet the highest educational and ethical standards. Get in touch today to see how we can help!

How to keep your loan application on track

For the best possible chance of getting the loan that suits your circumstances, you need to tick all the boxes. If an application is not completed correctly, you risk delays in approval, or even being declined by potential lenders.

Other than the obvious documentation that needs to accompany an application, satisfactory identification and evidence of income by way of pay slips; many lenders will expect to see a reference from your employer, group certificates or tax returns, and records of any investments or shares that you might have.

If you are self-employed, you will need to organise alternative documentation to prove income, such as financial statements relating to the profit and loss of your business going back two years.

Lenders will also want to see bank statements going back a few months in order to track your spending and savings history. Most importantly, you will need to provide the details of your debts.

“I commonly see the same type of document sent back from the lenders, often due to non-disclosure,” explains Anthony Wickremasinghe, Business Development Manager at lender Liberty Financial.

You must include documents that outline HECS debt, personal loans, credit card liability and any expenses relating to dependants. If you don’t disclose this information, your loan will very likely be declined.

In order for a lender to assess your capacity to service loan repayments, every financial detail must be taken into account.

Lenders want to see proof that you are capable of managing the responsibility of the loan, through steady employment, a good credit history and a debt-free approach to your financials.

“We like to help customers that are in trouble. But if they have bad habits, we can’t really help them before we know that they can commit to us in the future,” Wickremasinghe says.

By having all of your documents organised and a saving and repayment plan documented, as well as evidence that you can commit to the plan, you will increase your chances of receiving the loan you are after, even if your credit history is not perfect.

“We do look at customers who have had hardship issues,” explains Wickremasinghe.

“If we can see that they are trying to help themselves, and going forward we are putting them into a better situation or a better product, then we will proceed with that.”

In many cases, home loan applications require professional guidance and help, we have the expertise to match a loan to a borrower and help you to ensure that your documentation is in order.