As it becomes increasingly difficult for Australian expats and younger professionals to borrow money in Australia, many are turning to parents and other family members for support. One common strategy is for the parents to act as Guarantor for their children, but just what does this entail and what are the risks of being a Guarantor for your family members.
One of the most common forms of acting as a Guarantor is to provide security for the loan rather than cash towards the deposit. This is typically achieved by offering your own property as security, which allows the bank to utilise the equity. What this results in is two properties being used as security for the bank, both the guarantor’s property and the new property being purchased. Not only can this make the borrowing possible, it can also reduce or eliminate the need for Lender’s Mortgage Insurance if the Loan-to-Value Ratio (LVR) is below 80%.
These are the positives for your children of how acting as a Guarantor can benefit them, but what are the risks for you as the Guarantor if there are ever difficulties with repayments or changes in circumstances.
Reduced Borrowing Capacity
If you’re looking to borrow money in the near future, you may want to consider the impact of acting as Guarantor for your children will have on your own borrowing capacity. A bank or credit provider will include the loan as a liability on your balance sheet, even if you’re not the one making repayments, as you could be ultimately responsible for it.
Credit Report Issues
If in the event that your children can’t make repayments on the loan, and you are required to make them on their behalf but can’t, this could tarnish your credit report. It’s important to consider what impact this may have on your future borrowing and any existing credit facilities you may have.
With divorce rates remaining high, it’s always important to consider the implications for yourself if your child’s relationship were to end. While it can be a very generous step to offer to act as Guarantor, ensure that you’ve protected yourself in the event of any potential family disputes.
Remember, always plan ahead, seek professional advice and explore if acting as Guarantor is in fact the best option for you to assist your children in completing their property purchase.
LoanSuite Pty Ltd is your lending partner for all of your home loan, investment property, business and commercial financing needs. With our wide range of lending solutions, expertise in financial planning and investment strategies, and extensive experience in working with both Australian residents and Australian expats, we are your partners for your lending needs.
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LoanSuite Pty Ltd is an Authorised Credit Representative (Credit Representative Number – 494608) of My Local Broker (Australian Credit License – 481374). Important Disclaimer: Your complete financial situation will need to be assessed before acceptance of any proposal or product.