Home Loan Guarantor in New Zealand: What You Need to Know

Introduction
When it comes to securing a home loan in New Zealand, many borrowers might come across the term "guarantor." A guarantor can play a crucial role in the home-buying process, particularly for those who may not have enough deposit or who face challenges in meeting lending criteria on their own. This article delves into the concept of a home loan guarantor in New Zealand, exploring what it means, how it works, and the risks and benefits involved.

What is a Home Loan Guarantor?
A home loan guarantor is a third party—typically a family member, such as a parent—who agrees to take responsibility for the borrower's home loan if the borrower is unable to make repayments. This guarantee provides the lender with additional security, making it easier for the borrower to obtain a home loan. Guarantors are usually required when borrowers do not have sufficient deposit funds or when their income or credit history is not strong enough to secure a loan independently.

How Does Being a Guarantor Work?
In New Zealand, being a guarantor involves signing a legally binding contract with the lender, agreeing to cover the loan payments if the borrower defaults. The guarantor may use their property or other assets as collateral for the guarantee. This means if the borrower fails to meet their loan obligations, the guarantor's assets could be at risk.

The guarantor does not receive any financial gain from this arrangement but provides a safety net for the lender and helps the borrower secure a loan they might not otherwise be eligible for. It's important for potential guarantors to understand the full extent of their obligations and the financial risks involved before agreeing to guarantee a loan.

Types of Guarantees
There are generally two types of guarantees: limited and unlimited.

1. Limited Guarantee: In a limited guarantee, the guarantor's liability is restricted to a specific amount or timeframe. This type of guarantee is less risky for the guarantor as it caps their potential financial exposure.
2. Unlimited Guarantee: An unlimited guarantee means the guarantor is liable for the entire loan amount and any associated costs if the borrower defaults. This type of guarantee carries more risk and can significantly impact the guarantor's financial situation.

Benefits of Having a Guarantor
For the borrower, having a guarantor can offer several benefits:

• Increased Borrowing Capacity: With a guarantor, borrowers may be able to borrow more than they could independently. This is particularly helpful in markets where property prices are high, and saving a large deposit is challenging.
• Lower Deposit Requirement: Lenders often require a lower deposit from borrowers who have a guarantor, which can make it easier to enter the property market sooner.
• Potentially Lower Interest Rates: Some lenders may offer more favorable interest rates to borrowers with a guarantor because the perceived risk is reduced.

Risks and Responsibilities for Guarantors
While acting as a guarantor can help a loved one secure a home loan, it comes with significant risks and responsibilities:

• Risk to Personal Assets: If the borrower defaults on the loan, the guarantor may be required to sell their assets or property to cover the outstanding debt.
• Impact on Credit Score: Acting as a guarantor can affect the guarantor's credit score, especially if the borrower defaults and the guarantor is unable to cover the repayments.
• Reduced Borrowing Capacity: Being a guarantor may limit the guarantor's ability to borrow money for their purposes, as lenders will consider the guarantee when assessing the guarantor's financial position.

What Should a Potential Guarantor Consider?
Before agreeing to be a guarantor, it’s crucial to evaluate the financial stability and reliability of the borrower. Potential guarantors should consider the following:

• Borrower's Repayment Ability: Assess the borrower’s ability to make loan repayments. Can they afford the mortgage even if interest rates rise?
• Legal and Financial Advice: Seek independent legal and financial advice to fully understand the implications and risks of being a guarantor.
• Personal Financial Situation: Consider your financial stability and whether you can afford to cover the loan if the borrower defaults.
• Emotional Impact: The decision to act as a guarantor can strain personal relationships, especially if financial difficulties arise.

Alternatives to Becoming a Guarantor
There are alternatives to becoming a guarantor that can help potential borrowers without exposing themselves to significant financial risk:

• Gift or Loan: Instead of acting as a guarantor, a family member could provide a gift or loan to the borrower to help with the deposit.
• Co-ownership: Another option is for the guarantor to become a co-owner of the property, sharing the mortgage responsibility. This way, the risk is shared, but both parties benefit from any property value increase.
• Savings Boost: Encouraging the borrower to save more towards their deposit can reduce the amount needed and potentially negate the need for a guarantor.

Conclusion
Becoming a guarantor for a home loan in New Zealand can be a generous way to help a family member enter the property market. However, it is not without its risks. Potential guarantors must carefully consider their financial situation, seek professional advice, and weigh the pros and cons before committing. Understanding the responsibilities and risks involved is crucial to making an informed decision that protects both the guarantor and the borrower.