What you should know before you sign a guarantee on your child’s home loan
28 Mar 2018
If you are considering ‘going guarantor’ for your child as they buy their first home, be aware that there are risks for you. Don’t think you are just adding your signature to a financial document to ‘help’. What are the risks? In part 1 of this series, Caitlin Meers, Lawyer with Snedden Hall & Gallop, discusses what can happen when you sign a guarantee and the importance of seeking advice on financial documents.
In part 2, Caitlin explains what can happen when you sign a guarantee as a Director of a company.
In a market where the price of real estate is at record heights, there is increasing pressure on lenders to ensure that individual and commercial borrowers are fully informed about their rights and obligations under loan agreements. In addition, lenders are increasingly requiring that loans granted by them are guaranteed to prevent default.
A common scenario is when a young or first home buyer enters the real estate market and attempts to borrow slightly more than they can afford. They might be purchasing in a high density and fast growing area where the value of property will not increase for some years. Lenders and brokers often ask the parents of the borrower to provide a guarantee over that loan.
Let’s say your adult child is a first home buyer. They have a small deposit and a significant sum they wish to borrow from a financial institution. When borrowing funds from a lender, they will be provided with a loan agreement, terms and conditions and a letter of offer by their lender.
When a borrower applies for a loan, the lender (usually a bank) will advise the amount the lender is prepared to lend, along with the terms and conditions attached to that loan. If the lender is concerned about the borrower’s capacity to repay the loan (either in the event of a default or otherwise), the lender will ask that the borrower find another person to guarantee that loan by providing an additional security. In this case, they ask you.
The guarantee is usually along the terms that in the event that your child (and potentially that child’s spouse/de-facto partner) fails to repay the loan, that you, as the guarantor, will step in and cover the repayments. Guarantors are often required to provide an additional source of security, usually by way of the family home.
Firstly, we know why you would want to do this. You’re thinking: “with the cost of real estate, how else will my child get into the market?” So let’s just be blunt: If the borrower defaults on their loan, then the debt becomes the guarantor’s.
Specifically, this means that for the new loan, the bank may hold a security over the actual property being purchased and an additional security over the home (or investment property) of the guarantor.
Giving a guarantee involves considerable financial risk for the guarantor(s) because of the new loan and the additional security taken over the guarantor’s other assets. For this reason, it is very important that all guarantors seek legal advice prior to executing legal documents.
Getting Independent Legal Advice
Many people are advised by the borrower’s lender that they only need to get a lawyer to witness their signature on the lender’s documentation. In the majority of cases, the documents actually require that the guarantor seek independent legal advice before the lender will accept the documents for processing.
In order to provide that advice, a lawyer is required to carefully consider the documents, then meet with you to ensure that you understand your rights and obligations under the guarantee. Your lawyer will advise you whether you are signing a secured or unsecured loan, whether there is the option to guarantee a portion of the loan and whether other costs can be claimed by the lender including interest, legal advice, etc.
With full understanding, the documents can then be executed (signed by you).
How can Snedden Hall & Gallop help you?
The team at Snedden Hall & Gallop Lawyers can assist you if you are considering going guarantor for your child by providing you with advice on loan agreements and guarantor documents, including the provision of a certificate of independent legal advice. All lenders prepare documents differently and as such, our advice will be tailored to your specific circumstances and the documents prepared by the relevant lender.
We assist a wide range of clients including individuals, families, investors and company directors. Please contact us by email or by phone on (02) 6285 8000 to speak to a member of our experienced business team.
Look out for our blog post on going guarantor as the director of a company – and what it could mean for you personally.