13 Apr 2011
A recent article in The Age prompted this blog about whether it’s a wise decision to go guarantor for friends and family when they’re buying a house. It could be a dangerous decision if you’re not careful!
In any situation where people borrow money from family and friends, you run the risks of jeopardising the relationship. Finance is a common cause for failed family and romantic relationships, and friendships.
The article talks about a local Casula couple who helped their son buy a house, but who found themselves in a legal battle to save their own home after their son failed to make repayments, forcing them to do so on his behalf. Without going into the details of the article, which you can read here, it brings to light the real risks involved in going guarantor for a home loan and it should serve as a lesson to all Casula home owners.
If you sign as a guarantor for someone, you are essentially giving them access to use your assets as security against their loan, so in the instance that they don’t make payment, you are then liable for the loan in its entirety. It’s as though you were defaulting on your own home loan.
It is imperative that you know what you’re getting yourself into if you’re asked to be a guarantor for a family member, partner or friend, because it could be your home on the line if they don’t keep up with their payments. Changes in their life, such as unforeseen employment issues, sickness and inability to cover loan repayments will hurt you financially, as well as them.
The best option for you is to offer them a smaller loan rather than put your assets on the line for their loan. It is a tough lesson to learn if you go through with it and encounter problems, which can happen years down the track. Please be aware of what you’re getting yourself into before you sign anything.