Rapid increases in property markets around Australia have been a source of great satisfaction for property owners. With this issue facing many young Australians, an increasing number of parents are agreeing to guarantee their children’s home loan for their first property purchase. As a result, first time purchasers are now able to borrow almost the entire value of the property rather than saving to cover the cost of the deposit, stamp duty and transaction costs.
So what are the risks involved?
- In the event that your child becomes unable to repay the loan, you will become responsible for repayment of the loan;
- Usually your own property is taken as security for your child’s loan, so in the unfortunate event of your child defaulting on the loan, the bank will be entitled to sell your property. Your family home is now at stake unless you are able to borrow against it to cover the loan;
- Market fluctuations can be subtle but can have drastic effects for those without flexibility. For instance, in the event that the property market crashes, the loan to the bank remains payable whilst the equity in the home may have drastically dropped, making default a real possibility;
- In the unfortunate and unforeseen event that your relationship with your child breaks down, your child could sell the property and discharge their loan without discharging your guarantee to the bank. In such an event, your obligations to the bank as a guarantor remain, while your child’s property is no longer available to secure any loan or mitigate your loss;
- Other unforeseen risks such as unemployment or ill health of the borrower lead to default. People do not like to think about such things and so they are often overlooked in assessing total risk.
Our tips for managing these risks
- Always consider your own financial position when making a decision of this nature. Remember that if your child is unable to meet their obligations under the loan, the bank will not hesitate in selling your property to recover the loan;
- Do not let emotions get in the way of logic. Sure it may be your dream to help your children own their own home but what is their actual financial position?
- By lodging a caveat over the property for the duration of the guarantee, neither your child nor the bank will be able to discharge the bank’s mortgage without your consent;
- Consider external influences such as market fluctuations and interest rates.
- If possible, do not guarantee the entire loan but rather just a limited portion.
- If you have more than one property, DO NOT offer your own home as security;
- Consider how long you intend to guarantee the loan. Remember that guaranteeing a loan of this nature is a debt and can impact your own ability to borrow; and
- Always seek independent legal advice before agreeing to anything.
Contact a member of our Property Law Team to review your documentation and provide independent legal advice.