So, your son or daughter are finally moving out and leaving the family home. But wait, there’s a catch, they’ve asked you to guarantee their loan so that they can buy their first home. You want to help, but what does this mean for you and what should you know before you say ‘yes’.
In the event that your child defaults under their loan agreement, by going Guarantor you are agreeing that you will pay the guaranteed amount, along with any other charges or costs set out in the terms of your agreement.
In most circumstances your guarantee is secured. This means that you will be required to enter into a mortgage with the bank. This mortgage may be over your family home.
Often we hear Mum and Dad say “we will only be Guarantor for a short period of time”. Unfortunately, this is not always possible. There are many variables which need to be considered including ones outside of your child’s control. It may mean that security is held for many years and that this may impact on your future plans.
So, you’ve decided to say ‘yes’. Some things that you should consider:
With your child:
- Make sure that your child has insurance, the right insurance! This means income protection or life insurance so that they will be able to repay the loan at all times and you will not be called upon as guarantor;
- They should have a Will. Or, if they already have a Will in place, it should be updated to include a provision that you are to be released as a condition if the property is to be given to another person in their Will.
With the lender:
- Is there another option that doesn’t include securing your family home or having another property tied up (potentially) for many years?
The majority of lenders will require that you seek independent legal advice prior to agreeing to go Guarantor. Sometimes however, it might be too late and this could impact on settlement of your child’s property, or worse, they may be in breach of their contract if you fail to sign the Guarantee and the bank refuses to release funds.