The risks of going guarantor for someone
For those who don’t know, going guarantor is basically a commitment to the bank that you will pay off someone else’s debt if they can’t. It can be common that some parents will go guarantor for their children when purchasing their first home if the bank has any concerns with the child’s ability to pay back the loan or if they do not have a 20% deposit.
Unfortunately going guarantor is not just a signature on a piece of paper. As the guarantor, you are accepting the responsibility for the debt should someone else be unable to pay it and could essentially mean putting up your house as a security guarantee.
Should the situation arise where the guarantor needs to stand in and pay the debt, the bank will treat them as though it is their property, even though they have no ownership rights to the property. So you could be stuck paying for a debt that isn’t yours for an asset that also isn’t yours.
There are certain things to think about and questions to ask if you want to go guarantor for someone.
- Does the person that you are going guarantor for, have the ability to pay back the loan? Sounds simple doesn’t it, but think about it from a few different perspectives. Do they have a stable full-time, permanent job? How old are they? If the person you are going guarantor for is 55, and they are about to enter into a 25 year loan, that means that they need to work until they are 80? Do you actually think that is feasible?
- If the person was sick or injured, do they have adequate insurance so that if they are unable to work, they would still have income to pay the loan repayments?
- What other debts does this person have? Credit card, personal loans and car loans should all be considered if you are considering backing someone up this way.
- As the guarantor, ensure that you are there for the contract signing. You need to be fully aware of the obligations and costs associated. Feel free to take your time to ensure you read everything you are signing.
- Are you willing to lose your assets if something were to go wrong? Including any investments, cash or even your own home. This is the worst case scenario but be prepared to have an answer to that question. There are different types of guarantees, so you need to know whether you are required to put your assets up as a guarantee.
- Is the guarantee for a fixed amount of money, or is it for the total balance of the loan? You are able to guarantee just a portion of the loan, so consider this as an option if the person applying is just under the approval limits.
Clearly there are some pretty important factors to consider. The best way for a home buyer to avoid this is to have a deposit that is at least 20%. If you are considering asking someone to go guarantor, then think about the above and ensure that you have set yourself up in the best possible situation so as not to put too much pressure on the guarantor. Remember, what you are asking is a pretty big deal, so expect some personal financial questions to be asked.
– This post is from our resident senior financial planner, Cara Brett. Check out her details in our about us page.