What is a Guarantor and should you use one?

When it comes to securing a mortgage, having a guarantor can be an attractive option for many borrowers. A guarantor is someone who agrees to take responsibility for the mortgage repayments if the borrower is unable to make them. While many people are familiar with the concept of a servicing guarantor, who assists with making the repayments, a security guarantor is less well known. In this article, we’ll explore what a security guarantor is and the pros and cons of having one on your mortgage.

What is a security guarantor?

A security guarantor is someone who provides additional security for a mortgage loan. This is usually done by offering up a property they own as security for the borrower’s loan. This means that if the borrower is unable to repay the loan, the lender can seek to recover the debt from the security guarantor’s property.

Pros of having a security guarantor:

1. Increased chances of approval: Having a security guarantor can make it easier to get approved for a mortgage. If the borrower doesn’t have enough equity in their own property to secure the loan, the security guarantor’s property can be used to provide the additional security that the lender requires.
2. Lower interest rates: A security guarantor can also help borrowers secure a lower interest rate. This is because having additional security makes the loan less risky for the lender, which can result in lower interest rates.
3. Access to larger loans: With a security guarantor, borrowers may be able to access larger loans than they would be able to on their own. This is because the security guarantor’s property can be used to provide additional security for the loan.
4. Can help avoid Lenders Mortgage Insurance (LMI): In some cases, having a security guarantor can help borrowers avoid paying LMI. This is because the additional security provided by the security guarantor may be enough to satisfy the lender’s requirements without the need for LMI.
   
   

Cons of having a security guarantor:

1. Risk to the security guarantor: The biggest risk associated with having a security guarantor is the risk to the guarantor. If the borrower is unable to make the repayments, the security guarantor’s property may be at risk of being repossessed.
2. Limited financial freedom: With a security guarantor, borrowers may have less financial freedom than they would on their own. This is because the security guarantor’s property is being used to secure the loan, which can limit the borrower’s ability to sell or refinance their own property.
3. Legal complexities: Having a security guarantor can add legal complexities to the mortgage process. It’s important to work with a qualified mortgage broker or attorney to ensure all legal requirements are met.
4. Strained relationships: Having a security guarantor can put a strain on personal relationships, especially if there are issues with making timely repayments.

In summary, having a security guarantor can be a useful tool for borrowers looking to secure a mortgage. With a security guarantor, borrowers may be able to increase their chances of approval, secure a lower interest rate, and access larger loans. However, the risks to the security guarantor, limited financial freedom, legal complexities, and potential for strained relationships should also be taken into account. It’s important to carefully consider all the pros and cons before deciding whether a security guarantor is the right option for you.