We all like to help our children get ahead in life, particularly when it comes to offering financial support. For those without the ability to contribute direct funds to their child’s first home the next most obvious option is to act as guarantor on the mortgage.
Providing a guarantee is a simple process when all goes well. Sign a few documents and that’s the last thing you will hear about it. Unfortunately when things don’t go to plan problems can begin. As guarantor on a home loan you are effectively putting your name on the mortgage as promising to pay if the borrower doesn’t. This makes you responsible and puts your own assets at risk.
Unlike other financial arrangements, which usually offer an upside, being a home loan guarantor is largely an act of love and affection. You really have nothing to gain and everything to lose if something goes wrong. It’s important to realise this when the decision is being made and to consider who your mortgage guarantee is covering. Although you may be intending to offer it to your loved one anyone else who is also part of the mortgage document will also benefit from your guarantee. This will include partners, both personal and professional, and it’s important to understand that your guarantee will extend to them as well.
How well do you know the financial situation of others involved in the mortgage? Are you willing to extend your guarantee to them also? It’s important to understand just how far your liability can extend and the implications this has.
Don’t make the mistake of not putting things in writing even when dealing with family members. You will need to sign documents relating to the lender however you might also want to consider having a separate agreement with the borrower laying out the expectations you have if the guarantee is enforced. Again this is important if there is another partner involved as relationships of both a personal and professional nature can end – your guarantee however will not be dependent only on this relationship. If your child should split with a partner this won’t reduce the expectation the lender will have of your responsibilities.
One important part of the guarantee process is determining when the guarantee will end. Unless you are clear on this most lenders will leave your guarantee in place indefinitely making you responsible not only for the current mortgage but for future borrowings that the lender may have with the home owner. If this is not your intention you need to make sure your guarantee is removed once the mortgage comes to an end. Sadly there is more than one horror story of guarantors who have thought their obligation has ended only to find themselves responsible for a later debt when it becomes overdue.
So what impact does being a guarantor have on your own borrowing capacity? If you are applying for a loan yourself your guarantee will normally show up on the lenders radar and they will take your potential obligation into account when determining how much to lend you. If you have any need for future borrowings yourself keep this in mind. You also need to consider the impact on your own credit rating should the mortgage default and you are left struggling to meet payments.
Being a guarantor carries a genuine risk for your own assets and is not a decision you should make lightly. It’s important to read the fine print in any agreement but, most importantly, you need to get an expert opinion so you fully understand exactly what you are signing. Consult with an experienced lawyer and discuss with them the impact that being a guarantor can have on your own financial situation. Ignorance is no excuse if the bank comes calling.
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The information provided is intended as a guide only and does not take into consideration your personal situation, needs and objectives and should not be considered as advice of any nature.