Due to current changes in the property market in Australia, and partially to the Global Financial Crisis of 2008, it is becoming increasingly more common for lenders to require that certain types of Buyers have a guarantor on their mortgage or loan.
A guarantor is someone who is willing to sign documents with the bank/lender that makes them liable for the Buyer’s loan or a portion of the Buyer’s loan in certain circumstances. In effect, a guarantor provides the lender with additional security in the event that the Buyer is unable to make the necessary re-payments under the terms of their loan. In practice, what this means, is that in the event that the Buyer defaults on their loan, the lender can pursue the guarantor for the missed payments or possibly the full loan amount. Guarantors are required to have existing assets, such as real property, stocks, shares, or businesses, which are used by the lender as security, in addition to the property which is being purchased.
So why would someone agree to be a guarantor? Banks have strict lending requirements, including evidence of genuine savings and large deposits. First home owners especially find it difficult to meet lending requirements and will require a guarantor to enable them to obtain loan approval.
Generally, guarantors are relatives or a business partner of the Buyer. Parents of the Buyer are the most common form of guarantor, and are able to provide additional security to the lender by virtue of having an existing investment property or substantial equity in an asset. The other most common guarantor situation occurs when a Buyer purchases a property in the name of a super fund trust, and the lender asks the Buyer to provide a personal guarantee for repayment of the debt.
If a Buyer has a guarantor on their loan, it is important to keep a few things in mind when it comes to the settlement of the property being purchased. The most important is that any guarantors to a loan also have to sign mortgage documents, and post the original documents with their signatures back to the lender. An easy mistake that many Buyers make is not ensuring that they have a longer period for the finance condition and/or settlement when their guarantors are interstate or overseas.
Another thing to ensure is that the assets that the guarantors are putting forward are in the correct name and match the current names of the guarantors – for example, if one of the guarantors has been married or divorced since purchasing their investment property and hasn’t had the title on the investment property changed, this may need to be done before the lender will settle on the loan.
Most importantly, Buyers will need to make sure that they advise their legal representation when there is a guarantor involved. This will assist in avoiding unnecessary delays in obtaining finance approval and settling on the property.