What do you need to know before going guarantor

Going guarantor: what you need to know before signing someone else’s home loan.

Female hands with small model of house as guarantor

The lack of affordable housing in Australia’s capital cities is something that not only affects young Australians, but their families as well. Parents of millennials who are struggling to scrape together house deposits may be considering if it’s time to intervene and help their children into their own property.

If you own your home and are considering using the equity in this property to give your child a leg up into the property market by going guarantor on their loan, there are some important factors that should be taken into account.

What exactly does going guarantor entail?
Going guarantor on your child’s loan essentially means that the equity in your property will be put up as security for the loan instead of a cash deposit. This means that the need for your child to front up to the bank with a lump sum deposit is gone and lender’s mortgage insurance will also be waived if you put up 20 per cent or more of the property’s value. 

It is important to distinguish between a guarantor and a co-signer on the mortgage. The main differences are that your income will not be taken into account for the approval of the loan, as your child will be required to service the loan on their own income, and the guarantee that binds you to the loan can be ended before the loan is repaid in full, once your child has built up their own equity.

What are the risks?
The risk for the guarantor in this process is that they are legally liable to pay back the amount signed on the guarantee should the borrower fail to meet their loan’s conditions. This means that if your child is no longer able to pay off their mortgage, depending on your circumstances, you may have to take out another mortgage or sell your home.

For this reason, a guarantor arrangement should not be entered into lightly. If you feel uncertain about your child’s ability to service their mortgage you should refrain from signing anything until this is resolved. It is also advisable to seek professional legal and financial advice before signing a guarantee.

What about my other children?
For parents with more than one child looking to enter the property market within a couple of years of each other, going guarantor for the first may diminish your ability to help out the second. It is unlikely a lender will allow you to be the guarantor on two loans at the same time as this is a highly risky position to be in.

It may be worth considering if there is another way you can help your children get into their own home that involves less risk. For example, you could contribute to their deposit using existing savings or allow them to live with you for a period while they save money for a deposit on their own.

Patricia Babalis is a personal finance writer for RateCity.com.au





    COMMENTS

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    KSS
    11th Oct 2016
    1:56pm
    Go guarantor only if you can afford the re-payments. If you never have to make them then great. But you just might have to.
    BtL
    11th Oct 2016
    2:04pm
    Never go guarantor unless you have control over the performance of what is being guaranteed and the guaranteed amount is capped.
    Cranky
    11th Oct 2016
    4:20pm
    In a word....No.
    CindyLou
    11th Oct 2016
    8:23pm
    I have to agree.
    MICK
    11th Oct 2016
    4:20pm
    The short answer is DON'T.
    My dear wife decided we should help one of our children and we guarantored their loan. Next thing the partner signs up for a $95,000 4WD and spends money for all manner of other indulgences contrary to our pre loan agreement.
    We have removed ourselves from this bad bad arrangement now but it caused a huge problem between us and our son.
    I again say be very wary about going guarantor and try to remember the wise words of I know not whom: 'do not go into business with family'. Whilst you may feels good about your kind act there are potential outcomes which kill relationships.
    My wife has gained a valuable life experience but it has cost us a heap of money and all but ruined the relationship we have with one of our children. Just not worth it.
    The wash-up: let the kids make their own way in life with a bit of assistance. If you are wealthy to excess then buy them a house. If not then leave them well off when their struggles are done and when they have matured enough to appreciate that money has a value.
    Good luck. I wish my wife would have listened but this is the double edged sword do-gooders carry. A valuable lesson in life though.
    Gammer
    11th Oct 2016
    7:33pm
    I helped my (single) daughter by buying her first home with her, 50/50. We shared all the set up costs but she paid the entire loan repayments, with a friend renting a room. When she was ready to upsize she paid out what was owed to me and then was in a position to go it alone. My son (then 20 yrs old) did it on his own from the start but began with a small villa unit, renting out a room to one of his friends to make it more financially viable. Both of my children are now in a good position for the future. The secret is to start small and then upsize when financial situation improves. Of course, in any financial dealings the person you help needs to be trustworthy!
    MICK
    11th Oct 2016
    9:38pm
    And to assess your children's partners as that is where the poison often starts. Congratulations to you as your outcome sounds like how it should end.

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    3:19am
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