Amidst the property boom in Australia, many new homeowners are capitalising on ways to maximise their borrowing power, and subsequent ability to purchase a house or property. One common way to maximise this borrowing power is through a guarantee on the mortgage. A guarantee is a contractual agreement whereby the guarantor agrees to fulfill the repayment and other necessary obligations of a borrower if the borrower fails to do so.
It is very common for parents to provide a guarantee for home loans obtained by their children to assist their children purchase property. It also serves to avoid paying additional home loan insurance where they fail to meet the threshold of a 20% deposit. However, parents must proceed with caution when guaranteeing home loans, particularly where they fail to protect their own assets including their property.
The general way that a guarantee operates is that if a borrower defaults on their mortgage obligations, the lender can pursue the guarantor for payment. So, if you act as a guarantor on your child’s mortgage, and they fail to pay the required repayments, you may be held responsible for the debt. Moreover, to add to this element of risk, often where a borrower defaults on their repayment obligations, the entire amount of debt becomes immediately repayable (or within a much shorter timeframe than originally agreed). Therefore, if the borrower defaults, the guarantor can be exposed to a plethora of significant liability.
Where a borrower defaults, the first port of call is for the guarantor to repay the remainder of the loan. Where they are unable to do so, the assets of the guarantor may be used by the lender to settle the loan. This will be easily achieved by a lender where the guarantor has put their own property as security for the loan. So, if the borrower fails to make their repayments, there is a risk that your assets will be seized in order to repay the loan.
In addition to these risks against your assets, there may be additional risks that affect your capacity to borrow money. A guarantor is under an obligation to inform a credit provider of any loans in which they act as guarantor. Therefore, this may impact the guarantor’s capacity to borrow money. Moreover, the failure of the borrower to repay the loan could reflect badly on the guarantor’s credit rating, further impeding on their future ability to borrow.
It is strongly recommended that you seek legal advice when acting as a guarantor, so that you can appropriately protect your assets and liabilities. Additionally, you must be mindful that you will be liable to fulfil the obligations of another party if that party fails to do so, and consider their ability to satisfy the requirements of the mortgage.
Chamberlains Law Firm specialise in asset protection and guarantees. If you are considering providing a guarantee for your children’s mortgage, we encourage to contact us on 02 6188 3000.
If you have any questions or concerns please contact our Property Director Ben Hatte on 02 6188 3600