To guarantee or not to guarantee?
They may have moved out – or not! But this isn’t necessarily the end of your responsibilities to your children. The relative lack of accessibility for first time buyers trying to enter the property market has led to an increase in guaranteed home loans. In other words, this is when the parents’ or other family members’ equity is used as collateral.
Before deciding you want to become guarantor for your child and looking at such home loans, you’ll want to consider the costs and benefits involved.
The case for going guarantor
Parents want to see their children happy, so helping your child become a home-owner is not only incredibly beneficial for your children but can be very rewarding too.
In a property market that is increasingly hard to enter, particularly for young people, getting a boost up from parents is helpful and may be the only way your child can afford their own home.
A guarantor loan means your children won’t have to save up for a full 20 per cent deposit, getting them into the real estate market earlier than would otherwise have been possible.
Your help will potentially save your child thousands of dollars in the home buying process. Typically, any loan that comprises over 80 percent of the property value is liable for lender’s mortgage insurance, which will be waived by having you as guarantor.
What are the risks?
There are risks involved in becoming guarantor and they should be addressed by all parties before a guarantor loan is undertaken.
If your children can no longer make their repayments, as the guarantor, that responsibility can pass on to you, which could be a drain on your savings account. This means that you become solely responsible for paying the entire loan back until the property is sold. If your guarantee is secured against an asset, such as your own home, you could end up losing that if you don’t have the money to repay the loan you’ve guaranteed and the property is sold for less than what it was purchased for.
Becoming a guarantor also impacts your credit rating and will likely lower the amount of money you’re able to borrow which should be considered if you’re an avid investor.
Family guaranteed loans can also impact your credit rating, because your credit history is then linked with the credit rating of your child or other family member, despite having no claim to the property, and little control over the outcome of repayments
These points are all worth carefully thinking about discussing with your children before committing to guarantee a loan. If you want to discuss any of these points further, I'd be happy to chat anytime.