Going guarantor on a home loan

Introduction

Australia’s property market is difficult to break into, particularly for younger people who have not had the opportunity to build up their savings. Parents or older family members often want to help but don’t always have the option of providing cash or a loan. One way of assisting is by acting as guarantor on your family member’s loan.

If you’re considering going guarantor, you need to think about the possible consequences and the worst-case scenarios. It is you who will be responsible for paying back the entire loan if the borrower is unable to do so.

This article will take you through some of the questions you should ask yourself before going guarantor and some processes to follow to mitigate the risk.

Should I go guarantor for my adult child?

Going guarantor is a big decision, with long-term consequences. Your role in guaranteeing that the loan will be repaid lasts for the lifetime of the loan. This means you are ultimately responsible for the loan (plus interest) until it is paid off or the property is refinanced.

Just because it’s possible for you and you really want to help does not mean going guarantor is a good idea. If you feel uncomfortable with the idea, let your child know that you need more time before making the decision. Try not to be pressured by their timelines or the necessity of securing a property, and take the time you need to make your decision.

Important questions to ask yourself are:

• Will you be able to service the loan if your child cannot?

• Are you being pressured to act as guarantor? Are there other ways you can help?

• Will there be expectations of similar support from other family members?

If you are feeling pressured and like you cannot say no, speak to a trusted friend or family member and let them know what is going on. You may also like to get support from your bank, lawyer or financial advisor to support your stance.

If you would like professional support to stand up to someone who is pushing you to do things you don’t want to, contact the Elder Abuse Helpline.

How will it affect my financial situation?

Being guarantor can affect your own borrowing power. Even if the loan is being paid off, a bank may not want to lend you more money in the future because of the size of the debt you are already responsible for.

Going guarantor may also affect your age pension and assets tests, particularly if you have to pay the loan off.

What if I’m confident I won’t need to step in?

Your adult child might be very sensible with money, but even the best intentions can go wrong, so it’s important to plan for the worst.

Your involvement lasts the life of the loan, which may be as long as 30 years. In that time your child might experience unemployment, a relationship breakdown, the death of a partner, bankruptcy, chronic illness or disability. Any of these things might affect their financial position and ability to make repayments – and then you would be responsible for repaying the loan.

You might want to consider guaranteeing a fixed amount rather than the full loan. Or, discuss with your child how and when the loan can be refinanced to reduce the risk to you.

What should I do when going guarantor on a home loan

1. Seek independent legal and financial advice

Make sure you understand the impact of the guarantee on your finances and assets now and in the future – including what happens if your family member defaults on their payments. Check with a financial advisor whether the loan will affect your income, tax, assets or borrowing power.

2. Understand the loan terms and make sure you can meet them

If your child can no longer make repayments, you will have to. This includes interest and charges for the life of the loan.

Using your own home as security against the loan means that you might be obliged to sell your house to pay off the debt.

3. Have transparent conversations

Talk openly with your adult child about what is involved and what you are willing and not willing to do. Discuss what will happen in unforeseen circumstances and explore whether there are other options available to support your child.

If possible, involve an independent person, such as a mutual family friend, who can offer an objective view and be a witness to what is being decided.

4. Document everything

Keep copies of all loan contracts and any decisions that are made about repayments or changes that could be made once the borrower has built up enough equity.