Should you be a family guarantor? - Harvest Financial Group

Interest rate announcement – November 2017

Today the Reserve Bank of Australia met to review the official cash rate. After last cutting rates in August 2016, the RBA have again decided to leave the cash rate on hold at 1.50% this month. Nonetheless, we have seen some lenders starting to increase their variable and fixed interest rates out of cycle and we expect others to follow suit.

Entering the property market can be challenging, particularly for first home buyers. One of the best ways that parents can help their children enter the property market for the first time is to become a family guarantor on their first home loan. However, doing so does come with some risk and isn’t right for everyone. In this article we explore some of the key things you should think about if you are considering becoming a family guarantor.

1. Are you financially fit to be a guarantor?

There are many reasons why the borrower may experience periods of interrupted income including loss of employment, serious accident and relationship breakdown. In most cases, should the borrower be unable to make the required loan repayments, the lender will become responsible for ensuring that payments on the loan are met.

Therefore, the first, and most important thing you should think about when considering becoming a family guarantor is whether or not you are financially able to meet the repayments on the loan if the borrower is unable to do so for some or all of the remaining loan term.

2. Do the benefits outweigh the risks?

Saving up for the full deposit can take a substantial amount of time. For the borrower, becoming a guarantor will allow them to enter the property market sooner by reducing (and in some cases, eliminating) the required deposit. This can be a substantial benefit and may make it possible for certain buyers to purchase a property who otherwise may not have had the opportunity to do so for some time.

However, becoming a guarantor entails certain risks, chief among them being the risks to your own financial security. In addition, some guarantor arrangements will require you to use your own existing property as collateral for the guarantee and therefore may put your property at risk.

Your ability to secure further finance once you have become a guarantor may be restricted as your lenders are likely to consider the guarantee when assessing any applications for finance in your name.

3. Are there other ways you can help?

Absolutely! If you have the ability to contribute to the buyers deposit amount through gifted funds, this can be a great way to help out without having to put yourself or your property at risk.

If you are considering becoming a family guarantor and would like more information, contact us.