Are your children or grandchildren requesting you to become a guarantor in securing their home loan? If yes, then you should consider the following:
A guarantor is a person who enters into a binding agreement with a credit provider (lender) promising to repay the loan if the borrower refuses or fails to repay the loan. Credit providers such as banks may require a guarantee before they agree to lend money to the debtor.
Each credit provider has its own terms and conditions that they will impose before making the loan application.
Generally, credit providers will lend the borrower up to 80% of the value of the home and in some cases the credits providers will agree to accept a guarantee so that the borrower can avoid paying mortgage insurance.
Before the credit provider provides the home loan, they will assess the proposed guarantor/s ability to act as a guarantor and require that they receive independent legal advice.
There are many risks when you consider accepting your role as a guarantor for someone else’s home loan, regardless of the nature of your relationship with the borrower (i.e. whether that be your son, granddaughter or any other family member or friend).
By agreeing to be a guarantor, you the understand and acknowledge that if the borrower cannot meet the terms of the loan, which in most cases is the monthly repayments, then you as the guarantor can be liable for those repayments, or at least for the percentage of the loan that you have guaranteed.
It is not unusual for credit providers such as banks to pursue the guarantor in order to recover all losses should the borrower default. And the losses can include recovery of repayments and shortfalls in additional to recovery and/or enforcement costs, taxes, interests, legal costs, enforcement expenses and any other associated costs. They can do this even before they pursue the debtor.
Furthermore, credit providers may require the guarantor to provide security over their own property as security as part of the guarantee. In these circumstances, there is added risk to the guarantor as there is a real likelihood that the guarantor may loss their home in order to cover the loan that the borrower owes the the credit provider.
We understand that as a parent or grandparent, you will be keen act in the borrower’s best interest and may provide a guarantee to the credit provider with respect to the borrower’s loan regardless of the risks involved.
Before taking any decision, just keep in mind that unexpected events can occur at any stage which may affect the borrower’s financial position. An example of this is if the borrower loses his/her job or becomes unwell and unable to work.
If you have received guarantor paperwork to complete from a credit provider and you decide to become a guarantor, please seek independent legal advice before accepting your proposed role as guarantor.
We welcome you to contact us at Anderson Boemi Lawyers if you wish to seek advice on becoming a guarantor.