Depending on the lender and your situation, it’s possible that you could act as guarantor on your child’s home loan. This is where you use the equity in your home (or an investment property) as additional security for the loan being taken out by your child.
It’s essentially a promise by you to the lender that your child will abide by their responsibilities as a borrower. And, if they don’t or are unable to, that you will repay the loan for them.
How it works
If your child doesn’t have enough money for a deposit on a home loan, having someone act as guarantor could increase their ability to borrow.
Under this type of arrangement, the property to be purchased will typically be used as the main security for the loan that’s being taken out, with the guarantor’s property providing additional security.
Depending on the lender, you can use your property as security on your child’s entire home loan, the entire loan amount plus additional costs, or limit the guarantee to a portion of the loan.
How long you act as guarantor will depend on various factors, but once your child’s loan has reduced beyond a certain level, you can ask to be released as guarantor, but this will have to be approved by the lender and fees may apply.
Who can act as guarantor?
Depending on the loan provider and their eligibility rules, guarantors may include:
- Extended family members
Note, acting as a guarantor is a serious legal responsibility and you may be required to get legal advice before a lender will accept the arrangement.
Potential risks to be aware of
While you may be able to help your child, there are still risks you need to be aware of before making a decision. Things to think about include:
- Your child could lose their job or become injured or ill and be unable to make their repayments. For this reason, insurance may be worth looking into
- If things don’t go to plan, the loan will become your responsibility. If you don’t have additional capital you may have to sell your own home in the process to clear your child’s debt
- Going guarantor reduces your ability to borrow funds, so it’s important to think about whether you have other plans or future goals that could be impacted.
What to discuss beforehand
You need to consider yours and your child’s circumstances, and discuss your expectations over the life of the loan before making any decisions.
Having an agreement in place could go a long way to ensuring everyone is on the same page. You may even consider writing down what you’ve agreed to so there are ground rules in place.
It’s also worth discussing how long you intend to act as guarantor and what your exit strategy is, as you may only be required to do it for the first few years as they pay down their loan.
Speak to your adviser about any additional risks, benefits and tax implications. And, if you don’t have an adviser, you can call us on 131 267 or use our find an adviser tool to locate one in your area.
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