Getting finance for your first home can be challenging. For some, having a guarantor is the answer to meeting a lender’s eligibility criteria and securing a loan. A guarantor co-signs the mortgage, taking on the co-signer responsibilities of paying the mortgage if the borrower cannot do so.
Having a guarantee from a third party, strengthens the borrower’s financial position and lowers the lender’s risk. As a result, the chances of getting a loan approved are increased. They may also get lower interest rates, better loan terms and access to a broader range of loan options.
What does it mean to be a guarantor on a mortgage?
Anyone willing and able to support a mortgage can be a guarantor. Due to the risks, it is typically a close family member such as a parent or grandparent. A mortgage guarantor must be financially stable, with a good credit histor. There needs to be sufficient income and assets to cover the mortgage repayments if necessary. Liabilities are taken into account when judging a guarantor’s eligibility. If accepted, they would need to provide security for the loan, such as a mortgage over their property or a cash deposit.
What are the risks to the mortgage guarantor?
Providing a home loan guarantee, is a significant financial and legal responsibility. They provide additional security to the lender, by committing to cover any mortgage payments should the borrower fail to do so. Deciding to provide a guarantee can help a loved one into their own home. However, the choice should only be made after getting proper independent legal and financial advice.
There are serious guarantor legal obligations. Guarantors are responsible for making repayments if the borrower defaults on the loan, including both principal and interest payments and any other fees or charges relating to the mortgage. If the lender cannot recover the debt, the mortgage guarantor could be sued and have their assets seized.
Any defaults on the loan would lower the guarantor’s credit score and make it harder for them to get loans in the future.
There is also a personal risk; if a guarantor ends up having to make payments, it could cause a lot of stress and damage their relationship with the borrower.
What are the alternative options for those who don’t have a guarantor?
For those struggling to get a mortgage with a bank, but are unable or unwilling to use a guarantor, there are other ways forward. These include:
- Wait and save a larger deposit to increase the likelihood of being approved.
- Get a joint mortgage with someone.
- Explore non-bank lender options – Platinum Mortgages specialize in these!
The appropriate approach depends entirely on individual circumstances. If you’re struggling to get a home loan in New Zealand, we can help. We review your situation, advise you on the options, and then manage the application process on your behalf. Save yourself a lot of time, energy and anxiety; get in touch today, and we can get you on your way.