Should I be a guarantor?

With the significant rise of house prices across the country, younger Australians face significant challenges on the journey to becoming a first home buyer.  

When you become a guarantor on your child’s home loan, you use your home equity as additional security for their loan. This reduces risk to the lender, allowing your child to pay fewer lender fees and secure lower home loan interest rates. 

Whilst becoming a guarantor for your child’s loan can be a financially supportive gesture, it is crucial for parents to understand the benefits, risks, and considerations before committing to such a significant responsibility. Here is a comprehensive look at what you need to know.  

The benefits of becoming a guarantor 

• • Easier loan approvals: One of the primary benefits of being a guarantor is that it can make it easier for your child to get a loan. Lenders are more likely to approve a loan application if there is a guarantor with a strong credit history and financial stability backing it. 
  • Lower interest rates: With a guarantor, the risk to the lender is reduced, which often results in lower interest rates. This can save your child a significant amount of money over the life of the loan. 

The risks of becoming a guarantor 

• • Financial liability: As a guarantor, you are legally responsible for repaying the portion of the loan you guaranteed if your child defaults. This means you could be required to cover missed payments, interest, and fees, which could strain your own financial situation.  
  • Asset risk: In some cases, your assets, such as your home, may be used as security for the loan. If your child defaults and you cannot cover the repayments, you risk having to sell these assets to repay the mortgage.  
  • Relationship strain: Financial stress can put a significant strain on family relationships. If your child is unable to meet their loan obligations, this could lead to tension and conflict. 

Important considerations 

• • Assess financial stability: Assessing your own financial situation before becoming a guarantor allows you to understand in what capacity you can help. Ensure you have sufficient savings and income to cover the loan repayments, if necessary, without compromising your own financial security. Speak with our team about becoming a guarantor and other alternative strategies.  
  • Legal advice: It is recommended to seek legal advice to fully understand the implications of becoming a guarantor. A solicitor can help you review the loan agreement and ensure you are aware of all your legal obligations. 
  • Limited guarantee: Consider negotiating a limited guarantee, where you only guarantee a portion of the loan rather than the full amount. This can reduce your financial risk while still providing support to your child. 
  • Monitor the loan: Stay informed about the status of the loan. Regularly check in with your child and the lender to ensure payments are being made on time and the loan is being managed responsibly. 
  • Plan for contingencies: Discuss with your child what will happen if they encounter financial difficulties. Establish a plan for how you will handle missed payments or a potential default. 
  • Evaluate alternatives: Consider other ways you might support your child financially that do not involve becoming a guarantor. This could include gifting money for a down payment or helping with budgeting and financial planning. 

Becoming a guarantor for your child’s loan is a significant decision that comes with both benefits and risks. While it can provide invaluable support and opportunities for your child, it also places a considerable financial responsibility on you. Carefully weigh the pros and cons and speak with one of our advisers to ensure you have a clear understanding of your obligations before making a commitment. By doing so, you can make a well-informed decision that supports your child’s financial future while safeguarding your own. 

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