A guarantor is someone who provides security for a loan. Lenders have varying requirements for who can be a guarantor, but in most cases, they are a close friend or relative and must be over the age of 18. When renting or buying for the first time, having a family member as a guarantor can help strengthen an application and increase chances of success. Becoming a guarantor doesn’t necessarily mean you have to lend money, you can also offer the equity that is saved in a property you own.
Guarantors are not co-signers or co-applicants, although they are on the sale or rental agreement. This is to provide assurance that payments will be made in the event that the applicant defaults on payment. As a guarantor, your credit can be affected if repayments fall to you and you also cannot pay. Home loan or rental agreement are usually large investments over a prolonged period of time, being a guarantor could affect your chances of taking out a loan for yourself. A credit provider will include your involvement as guarantor as a liability when assessing your application. Becoming a guarantor has no direct financial rewards nor do they have the right to own the property.
Like any financial commitment, it is important to have a plan. Circumstances may arise, such as illness or loss of job, which can affect the applicant’s ability to afford rent or repayments. Before agreeing to be a guarantor, look into whether the applicant can realistically afford the repayments and if you would actually be able to afford the repayments if they fell to you. It is wise to seek legal advice and understand all obligations before entering as a guarantor.
In the case of home loans, you do not have to guarantee a whole mortgage, just a portion matching that of the applicants. Once a significant portion of these repayments have been made or the property starts gaining equity, a guarantor can be released. In most cases, the removal process is fairly straight forward with each party involved required to sign a form.