Should I assist my child and be a guarantor?

Due to the negative misinformation regarding guarantor home loans from many years ago, we feel it is important to cover this in some detail. Times have changed, and with that, so have the ways each lender assesses their loans. 

The protection of the guarantor is the priority for every lender these days. The main reason for this is not so much the lenders changing the way they do things by choice. It is more to the fact that ASIC and APRA (who are the governing bodies in the finance industry) make and enforce the rules and laws regarding our industry these days. This is why the protection levels for the guarantor loans are now prioritised.

Both APRA & ASIC were established in 1998. In 2010, ASIC took on the role of regulating mortgage brokers also, to ensure we are operating with the customers welfare as our top priority. 

There have been many other levels of responsibility added over the years since then to our industry. Responsible lending guidelines are the priority simply because it is the law now. It is the way it should be. For further information please go to the APRA website. 

In addition to the above, no lender wants to be named on the evening news, taking a home from a parent who helped their child. They will be wanting to know that the loan has a very high success probability when assessing a guarantor loan.

These types of loans may not be as risky as you think – and can assist your child to enter the property market. 

By providing extra property security to the lender, this saves your child from paying the large mortgage insurance costs and equally as important, they will not be paying the inflated interest rates that are applied to mortgage insured loans. 

This keeps the overall loan under 80% of the overall value of the 2 properties the lender uses as security, being your home and the applicant’s home.

Assuming your child (and if applicable their partner) – both known as “The Applicant”, have asked you to help them buy a property. To help them, they have asked you “The Guarantor” to use your home as security.  

The lender looks at the value of your home, and the value of the home the applicants wish to purchase and adds them together. If the guarantor also has a loan on their home as well, then the loan balance for the guarantor’s property is also added to the calculations. 

The overall lending must remain below 80% of the total security being both properties to qualify. Some lenders require the guarantor to seek independent legal and financial advice before allowing them to be a guarantor. 

An important tip: If a lender requires legal and financial advice be given, they advise you of this when the loan contracts are issued. This is something to keep in mind and is very important. 

The reason being is, that once the loan application has been formally approved, the children will pay a deposit usually the same or next day to secure the property (Cash or Deposit Bond) and that deposit is legally now in the hands of the selling party and is non-refundable. The actual loan contracts are issued, and the legal advice certificate is requested as a part of those documents.  

The problem with this: If you need to have legal advice, the deposit is already paid and locked in. You are then receiving the legal and financial advice later.

It is a backward system that may change in the future, but all lenders follow this process presently. To not get caught out with any unknown issues, having a talk with your mortgage broker about the guarantor loan, will allow you to have some comfort about being a guarantor, making the legal and financial advice more of a formality. These pages on our website relating to the guarantor loan are designed to assist you in understanding this type of loan and will answer most of your questions.

In every Guarantor Home Loan, there will be two properties being used for security. The Guarantors home and the applicant’s home.

If the applicant for whatever reason, can’t pay the loan and the lender is forced to take action to repay the debt, the applicant’s home is sold first, not the guarantors home.

It should be safe to assume that the house would realise a sale price, equal to the original purchase price if an event were to occur in the short term, and therefore clear the debt. This releases the guarantor automatically.

In the unlikely event where there the property was sold for less than the purchase price, there may be a residual debt left over after the sale of the applicant’s property, (say $20,000 as an example) The lender would then approach the children for the shortfall. If they refuse to pay or accept a personal loan or other offers of finance, the lender will ask the parents to pay it, and if that is refused, then the lender would look at selling the guarantor’s home, as they are out of options.

How likely is this to happen?

It is all going to depend on a few factors. The questions you need to ask yourself are the following:

• Did the applicant have a deposit when they purchased the property? If they had $60,000 going into the transaction for example, then they have a buffer already. 

• Did the applicant clear or consolidate smaller debts prior to obtaining the home loan? If yes, were the payments from those cleared facilities added to the weekly home loan payments therefore increasing payments well above the minimum required? (We would have advised them to do this at the beginning of the loan if we used money from their deposit to clear their short-term debts to assist with affording the home loan)

• Did the applicant pay extra each week on to the home loan and reduce the balance substantially? This also creates a buffer as above.

• If the answer is yes to even one of these questions, and if the lender were to sell the property, then there should be no impact on the guarantor at all. The lender does not want to be on the news taking a guarantor’s home, so they will always try to protect the guarantor as well.

The lender and their process

• The lender will thoroughly assess the suitability of the applicant to buy a home.
• In that assessment the lender will consider applicants income and their ability to pay the loan, along with their previous credit history and their current commitments.
• Only after this has been thoroughly assessed and approved by the lender, would there be an approval for finance.
• The lenders are not approving a loan that the applicant cannot pay. In addition to that, It is not up to the guarantor to be responsible for making payments – even if they wanted to assist, it is not considered by the lenders as an option.
• This means that any risks associated with a guarantor loan, would be future risks. Something that has not happened yet, such as a divorce or loss of income. 

As I mentioned at the start of this blog, we see mostly upsides and only one downside to this type of loan.

We would encourage you to read more about these loans on our page, Information that every Guarantor needs to know. 

Downsides to this loan.

The one risk of a guarantor home loan is when the applicants home is sold and there is a residual debt. If for example they were left with a debt of $20,000, the lender will offer facilities to them such as a personal loan etc. If they refuse, they will offer the same terms to the guarantor. 

If this is also refused, then the lender would now have no option but to initiate legal action against the guarantor. They will always want the children’s loan to be repaid.

Should you assist your child?

In our opinion, a guarantor home loan is a great option, as long as the loan structure is set up for maximum efficiency which will include our own tips and ideas.

We have set up many guarantor home loans since 1998 and we know these loans very well. We will also be able to assess the overall scenario from a lending perspective, to provide you with comfort before you make a decision. 

We would also point out any issues that we consider to be a risk to a guarantor - if that were the case. Every application needs to be assessed on the merits of the children’s ability to reduce the debt and therefore release the guarantor when the loan is paid down to 80% of the property value.

 If you would like to speak to a mortgage broker about the suitability of this type of loan, please feel free to call us on 02 4257 5626.

We hope that this information on our blog has been helpful.

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