Beware the pitfalls of going guarantor
Going guarantor for adult children can seem like the simple solution to helping them onto the property ladder.
But going guarantor for your children’s loans comes with considerable risk.
A guarantor is under a legal obligation to keep making repayments on a loan if the borrower is unable to continue to make the payments.
Sometimes the guarantor’s home is required by the lender as security for loan but often the guarantee can be limited to a certain dollar value.
‘‘I generally advise against it,’’ says John Hewison of Hewison Private Wealth. ‘‘I have seen it come apart many times. The mere fact that a lender needs a guarantor indicates the borrower has insufficient funds to justify the borrowings.’’
What would happen if your son or daughter loses their job, divorces or separates, or suffers illness or injury and cannot manage the mortgage repayments, asks Laura Menschik of WLM Financial Services.
‘‘What if they get into trouble with their business or they are sued, and their home goes into the pot to pay damages?’’
Then the parents – looking forward to a comfortable retirement – can be stuck with their child’s mortgage.
It is not just the finances of the guarantor that can suffer.
Disputes and ill feelings over money can pull families apart. Often the problem is not that the adult child cannot service the loan, but that they cannot save the deposit.
And in Sydney and Melbourne, even a 10 per cent deposit can be a considerable amount of money. House prices have risen faster than incomes and so the required deposit has risen faster than incomes.
There are alternatives.
If they can afford it and it does not disrupt their retirement plans, parents could lend the money to them, Ms Menschik says.
But they should draw up a formal loan agreement and seek legal advice.
The parents have to make it clear in what form the assistance is provided – whether it is loan that is to be repaid or a gift, says WealthPartners’ Andrew Heaven.
The parents could have their offspring move back home for a while to help them save for the deposit, he says.
A lot of people want to give their kids a start in the market and think that buying them an investment property may be a good idea. But their children will likely want to do different things and may not want to live in the same city or even the same country.
‘‘Don’t go buy a unit for the kids thinking that they will want to live there,’’ Heaven says.