Thinking of being a guarantor? Ask these three questions first

Entering the property market is no easy feat for a first homebuyer, and it’s common for parents to want to help first homebuyers either through gifting funds for the deposit, or by acting as guarantor on the loan.

Before taking the plunge however, it’s crucial to be aware of the implications involved. Here are three questions to ask yourself to see if a family guarantee is right for you.

1. Am I financially fit to be a guarantor?

The first thing you should be certain of is whether you are in a financial position to pay off the loan if the borrower finds that they can no longer do so.

There can be many disruptions to an income, such as loss of employment or a serious accident, and some types of guarantor loans hold the guarantor legally accountable to ensure the mortgage is paid off.

Always get independent legal and financial advice if you’re considering being a guarantor to ensure your financial position is strong enough.

2. Do the benefits outweigh the risks?

It’s no secret that it can take a long time to save for a deposit and by becoming a guarantor you offer the borrower the chance to enter the property market sooner, and in some case even avoid Lenders Mortgage Insurance.

However, any time you borrow money, or a bank places a mortgage over your property, there are things that need to be taken into account. For example, there are certain factors that can put you or your property at risk and your ability to borrow for yourself will also be reduced after offering collateral against someone else’s loan as a guarantor.

3. Are there other ways I can help without being a guarantor?

If contributing to a deposit is an option, it allows you to provide a little help without needing to put yourself or your property at risk, but there are some extra hoops to jump through if a deposit includes gifted funds.

Gifted funds are not considered genuine savings by lenders. If the deposit is less than 20% of the property’s purchase price, the lender will most likely want to see five per cent of genuine savings from the borrower.

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