When a loyal son or daughter or other relative approaches you with the intention of asking you to sign as a guarantor for a business loan or for a new mortgage so they can purchase their own home, you should think extremely carefully about your obligations and how your finances could be affected in the future.
It’s always easier to think of the good you will be doing by providing a guarantee for the finance that your child requires at that moment in time, but you must also consider the downside and that you could end up servicing the entire loan or needing to sell their property if they can’t continue to make repayments each month.
What is a Guarantor?
When you sign as a guarantor, you are entering into a legally binding agreement with whoever is lending the money. You are agreeing to pay for the entire debt if your child can’t pay their portion that month and for as long as the debt is outstanding.
When you agree to be a guarantor, you should talk through the deal being offered by your child’s mortgage brokers so that you fully understand the size and type of deal that you are entering into, even if you don’t believe you can be paying any of it during the course of its term.
There is a risk to you that you will end up paying for the loan, which is why the bankers ask you to be a guarantor in the first place because they consider your child as too high a risk for one of many reasons. He or she may not have been in their employment for long enough or may not be old enough to have a long credit record which shows their expertise at repaying debt.
Replacing the Mortgage Insurance
Where you borrow over 80% of the value of a property, you as the purchaser, will have to pay for a mortgage insurance guarantee which doesn’t help you, but protects the bank or lender in case they ever need to sell your property and don’t realise the full amount of the outstanding debt from that sale; the insurance company provides the rest of the money.
With some of the banks and other lenders, they may allow you to offer the equity in your home to act as a guarantee so that instead of purchasing guarantee insurance for the mortgage company, they will be able to realise a share of your home if they need to call in their debt.
This will help your children who have a very small deposit or perhaps can’t afford to pay for the mortgage insurance as well as laying down the deposit, which can often run into thousands of dollars as with many lenders, it is added to the mortgage, meaning that they will repay more with interest over the course of the term and this will also eat away at the equity in the property.
Where you believe that acting as a guarantor for your children’s loan is one risk too many, you can say no, but you run the danger of your future relationship with your children not being as good as you would have wished for.
By guaranteeing to back up the loan, you are putting your own property at risk because you may not be up to pay the debt at the time the balance is called in. Our mortgage brokers, who serve Kwinana, Baldivis, and Rockingham, as well as the surrounding areas, will be able to explain the risks to you and your property by offering to be a guarantor.
Although you would always wish to do your children the biggest favour that you can, can you afford to put your property at risk?