Buying a home as a first home owner is hard work, as rising house prices make home ownership less accessible to young buyers.
As the former prime minister Malcolm Turnbull famously told a radio host, one way for the next generation to enter the property market is for their parents to give them a hand up and guaranteeing a home loan is a way of doing this.
But before doing so, your bank will require that you obtain independent legal advice regarding the transaction.
While many parents feel that providing guarantees for their children’s loan is second nature and provide it unconditionally, parents should pause for thought before proceeding.
Here are our top tips for making sure that you are entering guarantee transactions with all the facts:-
Selling your home may be more difficult
When providing a guarantee for a child’s loan the bank will generally require that you provide some security to support your guarantee. This will be in the form of residential or commercial property and the bank will put a mortgage over your property. Once this occurs, you will need a release of the mortgage over your home if you wish to sell and at that time, replacement security may need to be sourced to support the ongoing guarantee. You need to consider this in particular if you are thinking of down-sizing in the future. When you sell a freehold property and want to buy into a residential retirement village that operates on a licence system, you may not be able to substitute the security.
The guarantee will not disappear automatically once there is sufficient equity in the property
Often guarantees are required because the home buyer does not have an adequate deposit. The guarantor may be under the impression they are just guaranteeing the equivalent to a deposit and when the home owner obtains sufficient equity in their home, the guarantee will no longer be relevant. This will not automatically occur and guarantors should regularly check with the home owner and the bank to ascertain if there is sufficient equity in the home to allow for the release of the guarantee (and the associated mortgage over the guarantors home).
Are you prepared for the worst?
When the property is purchased, the last thing that new home owners or their guarantors may be thinking about is what would happen when a significant life event impacts upon them. Injury, loss of employment, marital breakdown and even death need to be considered as potential impacts on a home owner’s ability to make repayments over the course of their loan and guarantors need to understand the impact this would have on them if it occurred. Insurance is available for some of these risks and guarantors should be sure that the home owner has comprehensive coverage.
Impact upon guarantor’s estate
While risks to a home owner’s ability to make repayments should be fully considered, so too should the guarantors plan for their own circumstances changing. In particular, guarantors should review their wills in light of any guarantee given. As a guarantee is generally supported by a mortgage over property, it is necessary to consider whether special arrangements or equalisation needs to be added into a will of a guarantor to enable the guarantee to be released and the property distributed among all beneficiaries equitably.
These are just some of the important considerations when providing guarantees. If you have any questions regarding guarantees, then please contact one of our lawyers for advice tailored to your circumstances.