Many first-time buyers look towards their parents for help in getting a home loan. As a guarantor, you place your own home as security on the loan to help the buyer raise the money needed for a deposit.
Naturally, this places you at risk if the borrower defaults on the loan. You’ll have to handle the payments if the borrower can’t. You also won’t receive any financial rewards for acting as a guarantor.
Next, we are going to examine the main risks that guarantors face, and show you how you can manage them.
Risk #1 – Hurting Your Credit Report
The good news is that becoming a guarantor won’t have affect your credit report. As long as the borrower pays the home loan, you don’t need to worry about a thing.
The problem starts if the borrower defaults. That’s when you need to start making payments on behalf of the borrower. If you’re unable to do this, it shows up on your credit report as a default on the loan.
Risk #2 – Problems with the Borrower
There’s a good reason why most guarantors are the borrower’s parents. If something sours the relationship between borrower and guarantor, issues with the home loan may appear.
Again, the guarantor takes on the burden if this happens. Your relationship with the borrower may break down, especially if he or she defaults on the loan. Even so, you still have to make the repayments, else you may lose your house.
Risk #3 – Applying for Credit
Whenever you apply for credit, lenders look at the home loan you act as guarantor for. You don’t even have to be the one paying the loan. It’s still a liability on your credit report.
This means that being a guarantor could prevent you from getting credit elsewhere.
Managing the Risks
Even with all these risks, many people become guarantors so they can help their family members.
Fortunately, there are several things you can do to manage those risks.
Treat It as a Business Transaction
The personal relationship you have with the borrower should not be a factor when you become a guarantor. It’s important that you treat the loan as a business transaction, even when acting as guarantor for your own child.
As such, speak to legal and real estate professionals before signing any contracts. They’ll tell you how much risk you face and will ensure you are capable of acting as a guarantor.
Consider Other Options
The borrower may think having you as a guarantor is their only option, but that isn’t always the case.
For example, some lenders allow borrowers to use one-off gifts to cover the cost of the deposit. This allows you to help your family member without taking on a long-term risk. Speak to a home loan consultant to discover all your options.
It’s not just a breakdown in the relationship between borrower and guarantor that can give rise to issues. Accidents and unexpected incidents can cause serious issues, too. For example, the borrower may become ill or lose their job, making them unable to pay the mortgage.
You’ll need to step up whenever something goes wrong. That makes planning ahead vital. Make sure you can actually afford the loan payments, just in case you find yourself having to deal with them.
What to do next
Those are the risks associated with becoming a guarantor. You must be absolutely certain that you can handle them before you sign a contract. Do the following before moving forward:
- Find out more about guarantor loans.
- Figure out how much the borrower can borrow.
- Live chat with one of our mortgage brokers.
This information is general in nature, and you should always seek professional advice when making financial decisions.