Guarantor Information Page

Guarantor Information Page

Becoming a guarantor is a serious undertaking for anyone. There are many questions that should be asked about the person who needs you to be a guarantor for them (the applicant).

What do I need to know if I am asked to be a guarantor?

  • It is critical that you have an understanding of the applicant’s overall financial position. This is in addition to us  confirming the stability of their income and the past conduct of their credit history (previous loan facilities). It is very important to also know what facilities they currently have as well.
  • Your mortgage broker is trained in several areas of expertise in regards to this type of loan and knows what questions to ask, allowing a proper assessment to be completed.
  • We need to know that the applicant is likely going to gain an approval before we submit any loan application. It is much better for all concerned to know that the loan has a chance of being approved.
  • In addition to this, it is important that we select the best lender for the applicant. This is to ensure that the loan can be paid down as fast as possible in order for you to be released as a guarantor.

The lenders who provide this type of product are certainly not equal. From fees and charges to get into the loan, right through to restrictions in the lenders policy, everything needs to be analysed in order to assess which lender is going to be the most appropriate, for the loan needed.

As you know, we are free service for all non-commercial loans and it would pay you to contact your mortgage broker to discuss any concerns you may have about becoming a guarantor.

What are the risks if I will be a guarantor?

We will outline here some of the various risks associated with guarantor loans. These are very basic points in relation to the risks of being a guarantor.

It is impossible to determine if there are further risks that need to be assessed until we know the full circumstances surrounding the applicant and the guarantor and the reasons why the applicant needs this type of finance.

Risks to be aware of:

Obviously the main risk you face is if the applicant cannot meet the repayments and obligations of their loan, during the period that you are a guarantor and as a worst-case scenario, you will be liable to repay the debt.

That sounds scary, but is it really?

We provided the Guarantor Information Page so you can determine different risks that are not covered in the lenders normal approval process.

Let’s break it down into an example so that you can see what might happen:

Example:

Applicants have a home worth $400,000 and will also be borrowing a small amount of fees that are added to the loan.

Applicants have a total home loan of $405,000 with a limited guarantee provided by parents. The target loan amount to release the guarantor is $320,000 (80% of $400,000).

Three years after purchasing the property and assuming the loan has been paid on time and a few extra repayments were made, let’s assume that the loan balance is now $370,000.

Let’s assume at this time that the applicant’s decide to divorce and one of them refuses to pay the mortgage because they will not be living in the property. This could mean that on one income the applicant who is remaining in the property may not be able to pay the mortgage, forcing the loan into arrears. (We would suggest possibly renting the property to a tenant and move back home for a while), anyway, back on track…

So, now the loan is not getting paid. Now what happens?

Let’s fast forward a couple months to where the bank has initiated legal action and the result is that the bank can now take the applicants house and put it up for sale

The bank sells the house, and you would assume that they would possibly get close to $400,000 for this property, considering the price paid three years earlier.

The bank now takes the money to repay the mortgage loan out of the sale price of the property ($370,000) and also any applicable fees including the selling agent’s fees. This more than likely means that the debt has been repaid in full and the guarantor will have been automatically released. There may even be a bit of money left over.

Please remember that this was an example only and every loan scenario should be discussed with a credit analyst prior to making plans to become a guarantor.

There are no risks at all as long as the loan repayments are made on time. Otherwise the banks would not have this facility, would they?

The majority of risk is always going to be what is going to happen in the future, and no one can predict the future.

A few very important points to remember before committing to being a guarantor:

 Guarantor Information Page:

Important points to remember:

Depending on the circumstances of the applicant, there may or may not be a shortfall in the event that the applicants property would need to be sold to recover the debt.

If the applicant had an initial deposit and the loan amount was less than the purchase price of the property, say for example 90%, then there may be minimal risk to the guarantor.

You need to understand that in every guarantor loan that ends up in court, if the bank wins the case, the applicants property will be sold. It is only the residual debt, if there is any – that forms a potential problem.

On the flip side, if the applicant went into the loan borrowing 110% of the property value, which is possible, then the risk factor would be increased.

Just to be fair, the situation you need to look at here is: how long has the applicant had the loan? If it has been a few years then possibly the loan balance will be substantially less than the original 110% loan.

Another question to ask, if the applicant were borrowing 110% to pay out other external debts, did that give them the ability to repay a lot more into the home loan? Did they pay the extra? Did they have a lump sum that was used for the initial deposit? Has the value of the home increased? So many possibilities.

As you can see, the possible questions and scenarios are endless.

This is because we are dealing with unknown possibilities that probably won’t happen, but of course, could happen.

This is why it is essential for you to discuss the merits of this type of loan with a professional mortgage adviser who can look at the applicant’s situation and make recommendations based on the facts surrounding the applicant’s individual circumstances.

In our opinion, these loans are only risky when the right questions have not been asked before the application has been processed.

Lenders Approval :

A guarantor loan would not be approved if the lender has any doubts about the applicant’s ability to maintain the loan properly. The loan will be assessed and approved based on calculations surrounding the current situation of the applicant, at the time of application.

Local Knowledge:

  • As a guarantor, you will know the applicant much better than the broker will. You should speak with your broker if there are any “red flags” that you think need discussing about the applicant.
  • For example: If you know that the applicant is having difficulties at work and that there is even the remotest possibility that their income could be at risk, the time to discuss this with your broker is now.
  • This can relate to many different problematic areas and it would pay you to think carefully about the applicant and their circumstances.

Building insurance:

It is very important that the guarantor (you) satisfies themselves each year, that the applicant has organised adequate building insurance on the home.

  • If the home were to catch fire for example, you now have an extremely large loan compared to the value of the NOW vacant block of land.
  • The main issue here, is that if the house was not insured, then there is likely to be no provision for a new house to be rebuilt.
  • The bank would not be helping in this situation, as even if they would lend the money again to build a home, the newly constructed property would more than likely still be worth less than the new loan amount.
  • Further lending is not going to be an option in most cases and payments on the original loan amount must continue.

The biggest concern that we have as a mortgage broker, is when someone fails to pay building insurance on their home and if there is a catastrophic event.

Please don’t underestimate how important it is, that the building remains insured at all times.

No Pressure:

  • Under no circumstances should there be any pressure to provide a guarantee. Your mortgage broker is here to guide you to the right lender and to help you decide whether becoming a guarantor is the right decision for you and if so, what loan is going to be most appropriate for the applicant.

We are a consultants not salesmen. Much like your accountant or your solicitor.

  • The applicant should understand that they are asking you for assistance and that your right to say no should be respected.

How can I apply?

These are your simple steps to apply for a loan.
  • Contact us on the numbers above to speak to a mortgage broker, or complete our online enquiry form.
  • You will speak with a broker who will take into account your needs by discussing not only your requirements, but also any concerns you have, and offer you some possible strategies and ideas that you may not have thought about.
  • Once we know what you require, we will draft and email you a proposal– this will usually consist of a few options that are easy to understand.
  • Once you have had a chance to look at what options are available, you can contact your broker or the broker will call you, to discuss the proposal.
  • You can then decide if you wish to proceed or you may just want to discuss more options.

What are my other options?

There are many options available:
  • Whether you are after a variable interest rate, a fixed interest rate, interest only loan, equity loan or any of the other loans available, it is important that you find out what is available to you before applying for a loan.
  • The loans listed below are available for most lending purposes. Whether you are refinancing your home loan to a lower rate, or a property investor looking to buy that second or third property, we will have some ideas for you to consider.
  • Even if you are a first home buyer purchasing a new home or renovating your existing home, there are some great deals available from the banks and lenders that we are accredited with.
  • Please click on a link below to learn more about other loans that are available to you.
Summary:

NOTE: These pages are of general advice in nature. They have not taken into account your specific needs and objectives and are therefore designed to provide general information only. Before acting on any of the information contained on our website please have your Mortgage Broker assist you in determining the right product for your individual needs.

Posted 20 February 2015
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Specializing in Residential and investment lending.

Mortgage finance brokers located in the Wollongong, Corrimal, and Kiama and Shellharbour areas.

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