Should a family member be my guarantor?
You desire to enter the property market, and you're probably thinking how do I pull this through mainly because of your financial status. Well, entering such a market is no easy exploit for a new buyer. But then again, being a parent and not being able to make that deposit shouldn't deter your ambition, this is because you could still assist as a guarantor to a loan. Before taking such an exploit, it is imperative to be aware of the implications involved. These three questions should therefore plague your mind to see if a family guarantee loan would be right for you.
1. Do my finances permit me to be a guarantor?
If the borrower defaults, would you be able to pay the loan? Such a question should definitely be a primary stepping-stone, in your bid to do that family guarantee loan, because you ought to be certain of your capabilities first. There are so many variables once it comes to income, so many unforeseen things could happen such as, an accident, a loss of employment, and more still, some kinds of guarantor loans hold the guarantor legally accountable to ensure the mortgage is fully paid off.
It is usually advisable to seek independent financial and legal advice if you are considering such an exploit; some banks want to be certain that you can service the entire debt, you therefore need be in a strong financial position and have enough equity in your property to be a guarantor, says a finance broker.
2. Do the benefits outweigh the risks?
It's a known fact that it takes a long time to save for a deposit, but becoming a guarantor could give the borrower a chance to enter the property market sooner.
Lenders may treat the loan as an 80 per cent lend, so you avoid the costly lender mortgage insurance, (LMI)” the broker says. “You also don’t have to save up for a full deposit for the purchase, or any deposit at all.”
However, whenever you borrow money from a bank, or a bank places a mortgage on your property, there are definitely things you need to take into account, the broker explains. Considerably, in some instances I would recommend it, its definitely not the first option as there are certain factors that can put your property at risk. Even your ability to borrow may be jeopardised/reduced after using a guarantor.
3. There must be another way I can help without bring a guarantor?
If contributing to a deposit is an option, it allows you a little help without having to put your property or yourself at risk, but then again, there are some hoops you need to hurdle over 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 would definitely want to see five per cent savings,” the broker explains. “Having said that, there are a couple of lenders that would help you to use rents as genuine savings. So, if youve been renting for a while, it shows that you have the tendency to make repayments and then the reduced [less than 20 per cent] deposit may be used in that regard.
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*This information is not to be relied upon without speaking to your finance broker, tax agent or financial adviser.