What to consider when becoming a guarantor.

What to consider when becoming a guarantor

What does it mean to become a guarantor?

A guarantor is someone who agrees to be responsible for repaying a debt owed to a lender for a loan provided to another individual or business, if the borrower can’t make their repayments.

A guarantor supports the loan by providing lenders with additional security such as a property they own. By providing a guarantee, lenders may lend to the borrower in situations where they may not have been able to secure the full amount on their own.

This guide outlines important information and risks to consider before becoming a guarantor.

What are the risks if you choose to provide a guarantee?

If you choose to provide a guarantee, you’ll be signing a legal contract in which you agree to repay the home loan if the borrower can’t meet the repayment terms and conditions of their loan contract.

If the borrower is unable to repay their home loan, lenders will fi rst seek to recover the debt from the borrower (by stepping in to assist with the sale of the borrowers’ security), before they seek any security you have provided in support of your guarantee (unless they reasonably expect that after doing so, a substantial amount would still be owing).

The amount shown in the guarantee could be the entire amount of the borrower’s loan, or a limited amount, and you may be required to pay lenders the maximum amount shown in the guarantee, along with interest and reasonable enforcement expenses.

If lenders lend more money to the borrower at a later stage, either under the original loan contract or a new one, your guarantee will cover the additional borrowing too.

The maximum amount of your liability won’t increase unless you agree to this in writing.

In the event that you don’t pay, lenders may enforce their legal rights, which involves selling any security you have offered under your guarantee.

Agreeing to be a guarantor and providing a guarantee involves significant financial risk, which could result in you losing your property (it could be your family home) and/or serious monetary loss. Depending on the severity of the default and your ability to repay any amount required under the guarantee, your credit report may also be negatively impacted.

What are the risks if you choose to provide a guarantee?

There are a number of important points to consider when you choose to become a guarantor.

Here are some of the ways your financial situation may be impacted.

When security support (only) is provided, some lenders will assess the home loan application based on the borrowers’ financial information, others will require you to prove that you can afford to repay the guaranteed loan amount yourself.

Some lenders allow you to limit the amount you are liable for under the guarantee. Lenders can say no to your request if:

  • The limit you propose is less than what the borrower owes to them;
  • Lenders are obliged to make further advances or enter into further arrangements with the borrower; or
  • Lenders would be unable to secure the present value of an asset which is security for the loan (such as a house under construction).

You can withdraw from the guarantee through a written request to your Time Home Loans Mortgage Specialist:

  • Before lenders provide any money to the borrower(s) under the loan contract; or
  • After any money is first provided, if the final loan contract is materially different from the one the lender gave you before your signed the guarantee.

You can be released from the guarantee when your guarantee is no longer required by the lender. This could occur when the guaranteed amount is paid off by the borrower(s) and the loan is reduced.

Alternatively, you can end your financial obligation under the guarantee at any time by:

  • Paying the lender any money the borrower(s) owes at the time, including any further amounts they’re obliged to provide the borrower that are covered by your guarantee;
  • Paying the lender the maximum amount you’re required to under the guarantee; or
  • Suggesting another arrangement that the lender agrees to.

What else should you consider before becoming a guarantor?

You don’t have to become a guarantor. Lenders will reassess the borrowers’ home loan application and while they may not be able to provide the home loan without a guarantee or an additional monetary contribution towards the purchase price, it’s important for you to understand the risks before you commit. 

We highly recommend you seek independent legal and financial advice to understand your obligations, risks and impact on your financial situation before providing a guarantee and any supporting security. It’s important to consider your obligations under a guarantee and sign any guarantor documents free from any outside influence or pressure.

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