Most parents are more than happy to support their children, including lending them money and helping them with everyday life decisions. However, going guarantor on their home loan is a significant commitment to make.
Being a guarantor means accepting liability for the portion of the loan you guaranteed, which may cause problems if the worst happens and your child defaults on it. Before you agree to help your children in this way, take the time to think about the following factors.
If you haven’t had much experience in the property purchasing field, ask your child whether they’ve received expert advice from a property investment advisor. Having someone who works in the industry advise them of their options can mean that being a guarantor won’t always be necessary.
Property advisors can review your child’s financial situation and help them work out what they can afford the repayments they can expect, and the safest options to secure a property loan. If they recommend a guarantor for home loan certainty, you can at least enjoy more confidence knowing that your child received professional advice to reach that conclusion.
Though you would likely do anything to give your child the best chance of success in life, it’s helpful to be aware of the risks of going guarantor on a home loan.
It’s essential to understand that if they can’t cover their monthly repayments, you may be liable for the money they owe. This might occur if the home is sold to cover the mortgage, but the bank sells the property for less than the total owed. In such cases, the guarantor is generally required to cover the difference.
If you meet with property experts and financial advisors, you can learn all about the different ways to fund a home. Having a family member act as a guarantor is one of them, but there are other ways you may be able to help your child without taking on such a significant responsibility.
You may, for example, decide to provide them with a one-off gift. Just allow for gift tax if you choose this route. Otherwise, you might help them save by allowing them to move in with you rent-free while they earn the money they will put towards their deposit.
Some parents decide to purchase the property themselves, while others pay for their child to see a property advisor. You can do many things to help your child move into their first home without exposing yourself to risks that could damage your own financial situation.
Your child probably sought professional advice when deciding to purchase a home, so there’s no reason why you can’t also seek advice before becoming a guarantor. Find a financial expert who can answer any questions you may have about how it works and if there is anything you can do to minimize the associated risks.
If you decide to go ahead with being a guarantor for your child, make sure your expectations are clear. Set a financial limit, such as 10-20% of the property price, and discuss when your financial involvement in their mortgage ends. Generally, this is when there is enough equity for them to remove you as guarantor.
Most parents would go to the ends of the earth for their children, but anything involving your financial future requires careful consideration. Weigh up the pros and cons before you decide to help your child fulfill their dreams of becoming a homeowner.
I am Tristan who loves to ride and spend time with my jenny (horse) and my love Mark. After completing my graduation, I have been working as an accountant in a private firm in Cologne.