When your children were born, you had so many hopes and dreams for their future. You imagined a life filled with happiness and success. From day one, you set about helping them to achieve their goals, everything from learning their first words, to getting a job.
But for many parents, there comes a time when you might be asked to make a decision that could be of great benefit to your child, and very risky for you.
Guarantor Loans involve using the equity in your own home in order to secure the loan of a family member. Parents who agree to act as a guarantor for their child, are effectively putting their home up as security, and agreeing to cover any amounts that their child might be unable to pay in the future.
These sorts of loans are very helpful to first home buyers, because they allow individuals to borrow 100% of the purchase price or more, using the equity in their family member’s home as a kind of insurance.
Unfortunately, many parents don’t understand the weight of this decision, and the conditions that they will be agreeing to if they sign the loan. Some parents feel pressured to help out and don’t take the time to consider their options.
If you do want to enter into this sort of arrangement, there are a few things you can do to protect yourself:
Seek independent legal advice before you agree to anything. It’s best to address your concerns with a professional before an offer is made on a property. This will avoid a tricky situation for your child if you decide not to act as guarantor and they’re unable to settle.
Educate yourself about your responsibilities as guarantor so that you can make an informed decision.
Meet separately with your mortgage broker or lender so that you can ask plenty of questions without feeling pressured to sign.
Be honest with yourself about whether your child is ready for the responsibility of a mortgage. You know more than the lender does about their financial habits, and it’s in your best interests to be a little bit sceptical. After all, you will ultimately be responsible for any amounts that they can’t pay, for whatever reason.
Plan for the worst, and work out if you can afford to service the loan if something unexpected happens and your child becomes unable to make their repayments.
Insist on insurance to cover against illness, injury or sudden job loss.
It’s also worth considering all of the alternatives before you commit to act as guarantor. Sometimes a monetary gift to cover the deposit is equally helpful, and less risky for everyone involved. After all, you want to be able to enjoy your retirement in style!