Rising house prices are making it increasingly difficult to enter the market. Guaranteeing your children’s loans can help, but it is important to understand how it can impact retirement or investment plans.
Being a guarantor generally means using the equity in your own property (or an investment) as security for your child’s home loan. It can help them secure finance for a property they can afford, but may not have a large enough deposit for, and avoid the added cost of lenders mortgage insurance.
By guaranteeing a loan for your child you are helping them enter the property market and build their equity. It may also enable them to buy in a more desirable location and a home that better suits their needs.
THE RISKS
You may want to help your child but it’s important you don’t go into the transaction blind.
- You could be liable should your child default on the repayments (depending on the structure of the guarantee). If you can’t make the repayments, the lender may sell the home used as security
- Can incur a bad credit rating should a default occur
- Reduced equity in your property – this is only an issue should you need to borrow money for another purpose. Particularly if you want to buy an investment property, you can’t use the equity in your home because it’s already tied up in your child’s loan.
MINIMISING THE RISKS
Some of these include:
- Monetary gift or private loan – this involves borrowing money against your property in your name, and then gifting it to your child.
- Buy the property jointly with your child – this means your name is on the title and you have a certain percentage entitlement.
- Outline an exit strategy
When it comes to guaranteeing a loan, it’s always sensible to seek professional and independent advice.
Positively, its not forever. As financial situations change and as the loan decreases with repayments, there may be an opportunity for you to release your guarantee to free up your asset, without impacting your child’s loan.
For more advice on how this could work for you, please contact us!
