Guarantor loans explained

You may have heard in the media that house prices are the highest they've ever been and are out of reach of most people. One of the hardest parts of buying a house is saving a big enough deposit to get started. Luckily for some, a parent or family member can assist.

Put simply, a guarantor guarantees to pay your loan if for some reason you are unable to. The catch is the guarantor needs to provide their own property (can be the house they live in or a house used as an investment property) to lower the risk to the bank.

A guarantor loan is essentially when two houses are used to secure one mortgage to lower the banks risk of lending to you. To break it down further, if you buy a house for $1,000,000 and borrow $1,000,000 to pay for it, if the value of that house drops and you stop paying for it the bank loses money if they need to sell it. By using a guarantor's property as well the bank has access to more property should they need to recoup the money they've lent.

Not only does having a guarantor assist you to enter the market it also means you will be able to get a lower interest rate as the bank charges interest based on the amount of risk. It also means there is no need to pay Lenders Mortgage Insurance (this can cost thousands and you may want to give an extra thanks to them for helping you to avoid paying for this) and you can add the cost of Stamp Duty and other expenses to your loan also.

The risk in being a guarantor is that the people you have helped get a house stop paying their mortgage and that the value of the house has dropped below the amount of money owing to the bank. If that was to happen the bank who is owed the money will come to you to pay for the shortfall. You can limit a guarantor's exposure and it is a very wise idea to do this.