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What to Consider When Becoming a Mortgage Guarantor
Friday, June 13th, 2014

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By Craig Hollett, Director at Bowen Buchbinder Vilensky Lawyers

13 June 2014

Rising house prices affect many of us directly and all of us indirectly.  In cases where the parents of grown-up children see their kids getting first jobs, starting out in life, and facing the seeming impossibility of buying even a modest unit, it’s only natural to want to help.

Those parents who can afford to, often help their kids with a loan, soft or otherwise.  A recent survey in the UK shows that 1 in every 4 first home buyers borrows money from family or friends to help secure a place on the property ladder.  Loans to your children should be properly documented to protect you if your child and their partner, current or future, later separate and a question arises about whether your loan was a loan or a gift in the division of their assets.

But many parents are not in a position to give their kids a major financial leg-up.  In cases like these, where Mum and Dad have little spare cash, but do have equity in the family home, they may think about standing as guarantor to help their kids get that vital first home loan.

While the motivation to help is well-understood, the consequences of being a guarantor are not always understood as well.  Here are a few suggestions of things to consider if you are thinking about becoming a guarantor:

  • Take independent legal advice first.  You need to know what exactly you’re getting into, your rights and the possible consequences for you if your child defaults on their loan.   You don’t want to be in the position of having paid your mortgage faithfully every month for decades, only to have the bailiffs coming round to seize goods, or your property, because your kids get into financial trouble.  You also need to know if and how you can be released from your guarantee in the future.
  • Be sure that you know whether the guarantee is for a capped amount or the full amount of the loan.  A partial guarantee reduces your risk, and may be all your kids need to get the loan.
  • Have an agreement with your kids that creates an escape clause for you so that if your kids start earning a lot more, and/or the value of the property rises, they agree to refinance, and remove you as guarantor.  Regularly review this situation with your kids, at least on an annual basis.
  • Promptly seek legal advice if your child and their partner separate and you are a guarantor on their loan. The last thing you want to do is find yourself still guarantor to a loan for a property inhabited by your child’s ex and their new partner!
  • If you do guarantee the loan, avoid putting a caveat on your  own property .  Even if your kids don’t get into trouble, a caveat could frustrate your own plans to downsize or sell later.
  • Make sure you accept the lender’s offer to receive copies of all correspondence and documentation to the borrower.  You don’t want to find out that your kids have fallen behind on their loan only months after the event when a process server knocks on your door and serves you with a writ of summons.

Remember, you are not the first parent to go down the path of being a guarantor for a child.  There are many factors to consider and a lawyer used to working with mortgages can help you reach a positive outcome – which includes your peace of mind!

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