Splashed all over newspaper front covers are headlines reminding would-be first home buyers how hard it is to get a foot in the door in New Zealand’s property market. If you’re a parent of young adults, you might just find yourself in a position where you’re asked to become a guarantor. If you’re in a position to assist with a guarantor home loan, you may be the very thing that prevents your offspring from becoming eternal renters. No pressure, parents! However, before you and the kids pop the cork on the champagne, it’s important to do your research and be aware of any risks.
What does becoming a guarantor for a home loan mean?
Going guarantor for a home loan means, quite simply, signing a guarantee that you will cover mortgage payments if your child/grandchild can’t. Home Loan Lenders often ask for guarantors if they are concerned that the borrower can’t repay the money, or has a bad credit history.
Increasingly, parents and grandparents may be asked to sign a guarantor home loan – especially now that the reserve bank has tightened the Loan to Value Ratio and is demanding a 20% deposit in many cases. Sometimes, asking relatives to go guarantor for a home loan is the only way the younger generation can become first home buyers.
Does becoming a home loan guarantor just require a signature?
Becoming a home loan guarantor requires more than just a signature and, in fact, carries some very serious risks you need to be aware of. If things go ‘pear-shaped’, then in some instances parents could potentially lose their own homes to the banks by going guarantor and be left broke entering retirement.
Under a guarantor home loan arrangement, the lender can demand the mortgage payments or debt from the guarantor. The lender can even sell the guarantor’s house to recoup its debt in extreme cases.
Further risks of becoming a home loan guarantor
New Zealand’s Citizens Advice Bureau further emphasizes the importance of being aware of the implications of becoming a home loan guarantor.
“The most important thing to remember is that if the borrower gets behind in the payments, the lender has the right to chase you for the money rather than the borrower (the person whose loan you guaranteed). They may well do this if they think it will be easier to get the money from you rather than from the borrower,” the advice bureau warns.
“If you end up in financial trouble because you are the guarantor for someone else’s defaulted loan, your credit history could be affected so that you might have difficulty in getting a loan yourself.”
The Citizens Advice Bureau provides a checklist before you become a home loan guarantor:
|Home Loan Guarantor Checklist|
What does “unlimited deed of guarantee mean”?
An unlimited deed of guarantee means that when you agree to become a guarantor for a home loan, in most cases you are also becoming a guarantor for any debt, current and future. In other words, you are taking on more than the risk of the home loan.
The Banking Ombudsman has heard cases where the child/spouse has taken out further loans for business or rental properties, without the guarantor’s knowledge. When those loans went sour, the guarantor had to pay up.
It doesn’t pay to assume your child is good with money. Or, perhaps, the child’s choice of partner isn’t the best. If the child hasn’t been able to save a deposit up until now, who’s to say they won’t continue with their spendthrift ways and get into financial trouble with the house?
To make matters worse, if you change your mind you can’t simply cancel a guarantee. The lender has to agree to cancellation and won’t if the loan to value ratio on the home is too low, there is a problem with the payment history, or the child still isn’t earning sufficient money to pay the mortgage. Even after the guarantee is discharged, it’s still enforceable for two years.
Tips for a trouble-free guarantor home loan
Going guarantor for a home loan isn’t all bad. Many parents want to help their offspring into a home, and guaranteeing the loan is an easy way to do that. Just make sure to go in with your eyes wide open.
Four top tips for home loan guarantors:
- Use a mortgage broker and ensure that the guarantee is limited to a specific sum of money and not open ended.
- Get independent legal advice and sign an agreement between you and your child. Make sure that you have considered what will happen if your child splits from his or her partner.
- Don’t go guarantor on a loan that is with your own bank. It’s too easy for the bank to access your savings if something goes wrong.
- Consider loaning money to the child rather than going guarantor. But make sure you take a caveat out on the property.