June 29, 2019
Are you a parent of a child who is struggling to buy their first home? A popular strategy is to become a guarantor for your child.
Saving a home loan deposit with current house prices can be difficult. That's why many parents are tempted to become a guarnator for their child. However, there are some particular things you need to know about becoming a guarantor that could affect your future.
What is a guarantor?
A guarantor is usually a parent or family member who uses their own home as the security on their child's home loan.
The advantage of having a guarantor for your child is that it reduces the deposit amount required to secure the finance for the first home. Your child will be able to secure a home loan with a smaller deposit (or no deposit at all) and can help avoid Lenders Mortgage Insurance (LMI).
Before agreeing to be a guarantor, it is important to understand what you’re signing up to and how it could affect you in the future.
You will be liable for your child’s loan
If your child is unable to afford the repayments due to a change in circumstances such as a loss of income, you will become responsible for making those payments or paying back the remainder of the loan.
Should your child’s loan be in arrears, the lender will usually sell their property first to recuperate the costs.
But if the sale doesn’t cover the outstanding amount, your home may wind up in the firing line since you’ve offered it as a security for the loan.
Not only will your child lose their home, but you risk losing your own in the process so going guarantor has serious implications.
You can guarantee just a portion of a mortgage
You can lower your own risk by only guaranteeing a portion of the mortgage, which can be as little as 20 per cent, under an arrangement known as a limited guarantee.
Once your child has built up that equity in their property, a guarantor can ask to be released from the loan. Under this arrangement, your child can still buy a home with a smaller deposit and avoid LMI.
Going guarantor affects your credit rating
It can also affect your chances of securing finance of your own in the future - should you apply for any additional finance. That's because the value of your home will already be tied up as security for your child's home.
Even though you have no control over the repayments and aren’t the one making them, the lender will still assess the amount.
This will impact on your ability to take out an additional loan or credit.
Moreover, if your child defaults on their home loan repayments and you too are unable to afford the costs, that will appear on your credit rating.
Seek legal and financial advice
Going guarantor comes with financial risk to you and it is important that you seek legal and financial advice before signing on the dotted line.
It is a good opportunity for you to understand if it is something you can afford to undertake, particularly if you have future financial goals that may be impacted by being a guarantor.
Consider alternative options
Going guarantor isn’t the only way to support your child in buying their first home.
If your child can afford the repayments and they just need a boost to their deposit, consider providing them with a one-off financial gift.
This enables you to help them purchase a property and removes the risk of ongoing responsibility.
Mortgage Choice Mornington are here to help!
If you are considering going guarantor on your child’s home loan, the first step is to make an appointment with our team in Mornington & Mt Eliza. We can walk you and your child through the options for obtaining a home loan that best suits everyone!
Contact us today on 03 5973 4011 or click on the Contact Us at the top of the page.
