Should you go guarantor for your kids?

Should you go guarantor for your kids?

You’ve changed their nappies, raised them, paid for their schooling and given them warm food and a roof over their head for close to two decades. But this isn’t necessarily the end of your responsibilities to your children. 

According to recent comments by Graham Dossel, non legal director of MyCRA lawyers, a firm specialising in credit disputes, the relative lack of accessibility for first time buyers trying to enter the property market has led to an increase in guaranteed home loans. In other words, this is when the parents’ or other family members’ equity is used as collateral. 

Furthermore, an ING Direct survey from last year found that a whole 32 percent of Australian buyers received financial assistance from family members for their housing finance.

Before deciding you want to become guarantor for your child and looking at such home loans, however, you’ll want to consider the costs and benefits involved. 

The case for going guarantor

Parents want to see their kids happy, so helping your child become a home-owner is not only incredibly beneficial for your children, it also benefits you too. 

In terms of tangibles, however, it’s your children that get a real windfall from this. In a property market that is increasingly hard to enter, particularly for young people, getting a boost up from parents is helpful and may be the only way your child can afford their own home at this particular time in their life.

Your kids may not have to save up for a full 20 per cent deposit, which could mean getting into the real estate market more easily. And with property values having grown over the past decades, the likelihood is your equity can be of great assistance. 

Your help will potentially save your child thousands of dollars in the home buying process. Typically, any loan that comprises over 80 percent of the property value is liable for lender’s mortgage insurance, which can be waived if you are the guarantor. 

What are the risks?

It might sound too good to be true for your children, but you have to think about yourself. There are significant risks involved in becoming guarantor. 

If your children can no longer make their repayments, as the guarantor, that responsibility will pass on to you, which will be a drain on your savings account. This means that you become solely responsible for paying the entire loan back. If your guarantee is secured against an asset, such as your own home, you could end up losing that if you don’t have the money to repay the loan you’ve guaranteed.

With your children in a financially vulnerable place, and living costs rising, this isn’t farfetched. Ensure you have a serious discussion with your kids before agreeing to anything.

Becoming a guarantor also impacts your credit rating and will likely lower the amount of money you’re able to borrow. 

“Most people don’t know that family guaranteed loans can be dangerous for your credit rating, because your credit history is then linked with the credit rating of your child or other family member, despite having no claim to the property, and little control over the outcome of repayments,” said Mr Doessel.

Don’t let good intentions rush you into making a decision – these points are all worth carefully thinking about before deciding to help your child out. 

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Following the Global Financial Crisis, no-deposit loans, as they once used to be known, have largely been removed from the market. Now, if you wish to enter the market with no deposit, you will require a property of your own to secure a loan against or the assistance of a guarantor.

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Going guarantor means a person offers up the equity in their home as security for your loan. This is a serious commitment which can have major repercussions if the person is not able to make their repayments and defaults on their loan. In this scenario, the bank will legally be able to the guarantor until the debt is settled.

Not everyone can be a guarantor. Lenders will generally only allow immediate family members to act as a guarantor but this can sometimes be stretched to include extended family depending on the circumstances.

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The mortgage market changes constantly. Every week, new products get launched and existing products get tweaked. Yet many ratings and awards systems rank products annually or biannually.

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Real Time Ratings produces instant scores for loan products and updates them based what you tell us about what you’re looking for in a loan. In that sense, we believe the ratings are as close as you get to personalised; the more you tell us, the more we customise to ratings to your needs. Some borrowers value flexibility, while others want the lowest cost loan. Your preferences will be reflected in the rating. 

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Do other comparison sites offer the same service?

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