Going guarantor on a loan? Make sure you do your homework
25 November 2016
The dream of owning your own home without reaching out to family for support is becoming harder to achieve for many young people.
While low interest rates, government incentives and additional players in the home loan industry have helped open the door for some individuals and couples, it has been offset in many cases by the strong housing prices.
An article on news.com.au in May cited new research from ME Bank that revealed 20 per cent of mortgage holders in Australia had some form of financial help from their kin, including loans, gifts or going guarantor. These statistics were taken from survey of 1,500 mortgage holders, conducted by DBM Consultants in December 2015.
This trend is reflected in the number of clients we see here at Commins Hendriks who are looking to sign on as guarantor on a mortgage being taken out by an adult child or sibling.
The most common scenario we see is a parent or parents guaranteeing their child’s loan, with the guarantee secured by mortgage over the parents’ home or investment property.
Potential Risks
A guarantee is a contractual promise to meet the obligations of a borrower. The guarantor is personally liable for paying whatever remains on the loan if the borrower is unable to make the repayments. This could result in the property the guarantor uses for security being sold to repay the debt. The guarantor is also held liable for default costs, interest and enforcement costs.
The total liability can end up being much greater than the original loan.
Importantly, the lender (often a bank) does not need to pursue the borrower before pursuing the guarantor.
It’s important that the guarantor seeks legal advice before signing a Loan Guarantor document.
The financial institution involved often requires the guarantor to go through the Loan Guarantor documents with a solicitor to ensure they fully understand the legal obligations and potential ramifications if issues occur with the loan being repaid.
Here at Commins Hendriks, we can help you to understand the nature and extent of the potential liability under guarantee documents and identify whether a guarantee is right for you.
We can also help you to limit your exposure and manage the risk of liability.
If you are considering guaranteeing a loan, contact us for an appointment before making these arrangements to find out the best approach for you.
Our number is 1800 643 779.