Going Guarantor on a Home Loan? Here’s What You Need to Know

If you decide to help a family member or friend by becoming a guarantor on their home loan, you could be enabling them to enter the property market sooner. However, it’s important to understand that this decision comes with significant risks and responsibilities. As a guarantor, you could be liable for the entire loan amount or a portion of the loan repayments if the borrower is unable to make payments.

What is a Guarantor on a Loan?

A guarantor is someone who agrees to guarantee a loan for another person, typically a family member or friend. In the case of a home loan, the guarantor uses the equity in their property as security for the borrower’s loan. This means that the guarantor’s property can be sold to repay the loan if the borrower defaults.

By agreeing to become a guarantor, you are essentially vouching for the borrower’s ability to repay the loan. If they are unable to make payments, you will be responsible for repaying the loan on their behalf, as outlined in the loan contract.

Who Qualifies as a Guarantor for a Mortgage?

Different banks and lenders have varying lending criteria on who can act as a guarantor.

Typically, a family member or legal guardian over the age of 18 can become a guarantor. If you’re a parent, you can act as a guarantor, and other family members such as grandparents, siblings, adult children, spouses, de-facto partners, step-parents, siblings, and children may also qualify depending on the lender’s policy.

Some lenders may permit other relatives such as aunts, uncles, or cousins to act as guarantors, but this depends on individual lending policies. On the other hand, friends, coworkers, former spouses/partners, and those with poor credit reports usually do not qualify to become guarantors.

What to do Before Agreeing to be a Guarantor on a Home Loan?

Understand the role of a guarantor - a person who guarantees a loan for someone else and is responsible for paying back the entire loan if the borrower can't.
Consider your finances carefully before agreeing to be a guarantor. Make sure you understand the loan contract and the risks involved.
Seek advice from a financial counsellor if you are unsure or feeling pressured about a financial decision.
Know the risks of being a guarantor, including having to pay back the entire loan amount plus interest, the potential impact on your ability to get a loan in the future, damage to your credit report, and strain on your relationship with the borrower.
Explore alternative ways to help the borrower, such as contributing money towards a house deposit.
Be aware of financial abuse if you are being pressured to be a guarantor.
Review and understand the loan contract before signing as a guarantor.
Check the loan amount and make sure you can meet the repayments if the borrower can't.
Be mindful of loan security, such as using an asset like your house as collateral.
Consider the loan term, and avoid guaranteeing loans with no specified end date.
If asked to guarantee a business loan, make sure you understand the loan contract and review the business's financial health and prospects.