However, for many parents nowadays, this aspiration can be a cause for concern when children come to you asking whether you could act as guarantor for their loan in order to save costs.
Why does this happen? In simple terms, many first home buyers today find it difficult to save a large enough deposit to cover 20% of the purchase price of the home, along with all the additional costs such as stamp duty.
Buying with less than a 20% deposit normally means that the lender will require the buyers to take out Lenders Mortgage Insurance, (LMI), which adds to the total value of the loan, (and therefore the repayments).
However, many lenders will waive the requirement for LMI if the loan is guaranteed by a family member with sufficient equity in their own property…in most cases, the parents. Obviously, most parents would love to be able to help out their children in this way, but before you sign on the dotted line, you need to think about the potential risks.
If your child is unable to make their repayments, you as guarantor have responsibility for repaying the loan. If the guarantee is secured against an asset like your own home, you could potentially lose your home if you don't have the cash to repay the loan you guaranteed.
The last thing your child wants to do is place a financial burden back on you, however we need to remember that we are all financially less stable at a younger age, and unseen changes in circumstances can have a far more profound effect at that time of our lives.
You also need to consider what would happen if your child buys the property as a couple, and that relationship deteriorates. The last thing you want is to suffer a financial loss because your child’s ex is not paying their share of the mortgage!
One other factor that many parents often overlook…When you become a guarantor it will affect your own credit rating, which can impact your ability to borrow money in the future for your next home, or an investment.
So while you may have the best intentions in the world where your kids are concerned, think long and hard about the potential consequences of becoming a guarantor before you commit to it. We’d hate to see you throw your “financial baby” out with the bath water.