Guaranteeing a loan for someone is a very generous act and can give a loved one the pleasure of home ownership much sooner than might have otherwise been possible. It’s also a tricky area in lending with seemingly endless policy differences between lenders on how it can be set up and the requirements to make it happen.
Firstly how can a guarantor help? Generally, a guarantor can assist a family member only, by offering their property as additional security for the family member’s new home loan when that applicant can’t get the deposit together. This means that the guarantor’s property must either be unencumbered or have a fair amount of equity built up in it. If there is a loan on the property, some lenders may require the guarantor to refinance into the new bank, or might need their existing bank to allow the new one to be second mortgagee, which isn’t always possible.
An often asked question is if the guarantor’s income can be used to help get the application approved. Unfortunately, the guarantor cannot help to service the loan in any way, which means that the applicants being helped must have the capacity to repay the entire amount of the loan including the guaranteed part, which all up can often be more than the full price of the property being bought, due to stamp duty and transaction costs. The only way around this is for the guarantor to instead become an applicant.
If the guarantor has the capacity to borrow, should they want to for any reason, their borrowing capacity is not normally affected by the guarantee, but it should always be disclosed to the bank, just like any other obligation, as they will decide whether the risk is acceptable.
Lastly, the incoming lender will often require that the guarantor seek and evidence legal and/or accounting advice. This forms part of their own duty of care and it’s an excellent idea anyway, to ensure that the guarantor knows their rights and obligations in all circumstances.
It’s an area of finance with a lot of red tape and interesting calculations, and the policies of lenders can often lay out remarkably different landscapes for borrowers and guarantors alike. Here the best advice is to seek advice.