The Truth About Being A Home Loan Guarantor
If you’re a mum or dad, chances are that you’re watching property prices going up across the country and worrying a lot about your kids buying a home of their own one day.
You may have thought about helping your child out by acting as a guarantor on their home loan but you’ve heard horror stories about guarantors losing their home if things turn bad.
The truth is that your child could get into a property this year, with no deposit down and you and your home wouldn’t really be affected at all.
The rewards of a guarantor loan
Your child doesn’t need a deposit to buy a home: they’ll usually need 5-10% of the purchase price to buy a home. So for a $600,000 property, they wouldn’t need to save $30,000-$60,000 as a deposit if you were able to act as guarantor.
Your child can save money by not paying a Lenders Mortgage Insurance (LMI) premium: With a 5% deposit on a $600,000 property, they could save as much as $28,591 in LMI (LMI rates vary from lender to lender). Discover how much they could save by trying the LMI calculator.
Discounted interest rates are available from some lenders.
They can consolidate some minor debts, such as credit cards, into the home loan.
You can limit the size of the guarantee to reduce your liability.
The risks of being a guarantor explained
Yes, it’s true: should your child be unable to make their mortgage repayments then you as the guarantor are liable for the outstanding debt.
One of the biggest misconceptions however is that the banks are like lions: if they sense that you’re child is struggling in paying their mortgage, they’re off, after your house to cover the debt.
Banks definitely won’t hesitate to uphold this part of the contract if they need to but this is only part of the story.
Banks really don’t like the hassle
The truth is they are pretty slow moving. There is a big process involved in having to sell your home and it’s too big of a hassle for what it’s worth. They’re not making a profit out of it, they’re just trying to cover their costs. Bank employees are expensive and all this hassle takes up a lot of time.
Instead, the banks will actually try everything to solve the problem before making the drastic decision to sell your child’s home because they’d much rather your kid keep paying their mortgage.
They’d much rather work something out with your child
If your son or daughter is late with a mortgage repayment or they’re in arrears, lenders will want to find out what the problem is and whether a solution can be found.
For example, if one of your child or their partner has lost their job but they happen to be, say, an IT specialist, chances are they’ll likely get another job in the near future and some lenders will take this into consideration.
If they have a partner that’s working, the bank may actually reduce their mortgage repayments for a certain period until they’re able to get another job.
The bank will take action on your child’s property first
Lenders will usually take action on your child’s property first before making you liable to pay out the outstanding debt. Your child will have to deal with the consequences but you’ll be protected.
Keep in mind that banks will only look to take action on your child’s property if the mortgage is in arrears for 90-180 days. Moves to repossess your child’s property, however, will only generally begin when arrears is around the 9 month mark.
Remember: it’s a limited guarantee
What if your child’s property is sold but it isn’t enough to cover the home loan?
Something that usually gets glazed over is the fact that a guarantor loan is a ‘limited guarantee’ meaning that the guarantor is only liable to cover up to an agreed amount, usually around 20% of the purchase price plus the costs of completing the purchase, depending on the lender.
For example, if the outstanding debt is for $600,000 but your limited guarantee is for only $140,000, you’re only liable to cover the outstanding mortgage up to $140,000.
So if your child’s property only sells for $400,000, you’ll have to cover up to $140,000 with equity in your property but you won’t be liable for the $60,000 shortfall. If the property sells for $590,000 you would be liable for $10,000. If the property sold for $600,000 you would not have to worry about anything.
Selling the guarantor’s property is always the last resort
Let’s say your child owes $600,000 on the home loan, the mortgage is in arrears and the bank has tried every avenue to repair the situation with your child. The bank will be forced to sell your child’s property to recover the money owed.
If the limited guarantee is $140,000 and the property sells for $580,000, the guarantor will have to come up with $20,000 to cover the shortfall.
What if you don’t have that amount in savings?
You may be able to cover the cost in the following ways, depending on your situation:
Equity in your property.
Getting a second mortgage on your property.
Getting a personal loan.
It’s only after these options have been exhausted that banks will move to sell the guarantor’s home but, again, the bank will only take enough to cover the home loan up to the limited guarantee. The rest of the sales proceeds will go to the guarantors.
Acting as a guarantor is a big decision so it’s recommended that you and your child seek independent financial advice.
You should really think about whether you’re in a position to help. Be honest!
Yes, a guarantor loan is a safeguard and a vehicle for getting your son or daughter into the property market sooner but a home loan is not a debt to be taken on lightly.