In the world of BOMAD (the Bank of Mum and Dad), there will often come a question that should fill parents (and grandparents) with dread: Will you go guarantor for my loan?
A guarantor home loan is when someone, usually a close relative like a parent, offers up part of their home equity as security to top up the buyer’s cash deposit.
It means the buyer only needs a small deposit or sometimes none at all, and avoids paying costly lender’s mortgage insurance (LMI).
If the first home buyer defaults on the loan the banks can go after the parents for the repayments instead, with the guarantor’s home at stake.
The most common ways parents help are guarantor home loans, cash gifts or loans.
Acting as guarantor for a borrower means you agree to repay the home loan if the borrower can’t meet the repayment terms and conditions of their loan contract.
If the bank needs to seek any security you’ve provided in support of the guarantee, you could lose your property and/or suffer other serious financial losses.
Your credit report, pension and Centrelink benefits may also be negatively affected.
Seek independent advice
Choosing to act as guarantor is a major commitment. It is strongly recommend you seek independent legal and financial advice to understand your obligations, risks and potential impacts on your financial situation BEFORE you make this commitment.
Not all Australian banks will permit a guarantor on a home loan.
This is partly because of the negative publicity generated when they are forced to foreclose on some poor old widow who unwisely guaranteed the loan for her drug-dealing son.
Some banks prefer first home buyers to pay for lender’s mortgage insurance, which can add tens of thousands of dollars to a loan.
Another reason some banks won’t offer guarantor home loans, is because the industry statistics show that people who get such a gift from their parents are three times more likely to default on their loan in the subsequent five years.
Be cautious, and take advice before you decide.
When it comes to Wills, asset protection & estate planning in Australia, you can trust the oldest law firm in South Australia, Genders & Partners to guide you through the tough decisions you must make for your family’s future care and welfare.
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