Due to the huge amount of negative misinformation regarding guarantor home loans, I felt compelled to write this little article. You can find a long winded version here.
These types of loans may not be as risky as you think – and the child might move out of your home sooner
As a mortgage broker, we see all benefits and only one risk – the risk is that the child might stay at home…
Jokes aside, we would like to walk you through the pros and con (yes one), of a guarantor home loan. The guarantor home loan would be one of the most misunderstood facilities in lending.
We understand that it is a serious decision to put your home on the line with blind faith that the child (the applicant) will “do the right thing”.
Let’s look at the whole picture. Your child and his partner, now known as “The Applicant” has asked you to help them buy a property. To help them, they have asked you “the guarantor” to use your home a security. Basing this article on the assumption that the applicant had their house for two years and got divorced and now one wage will not cover the repayments. (We used a two-year assumption simply because the applicant’s ability to service the loan at the time of the purchase would have been assessed by the lender and approved. It is any future issues that are of real concern.)
What will happen now?
- In every Guarantor Home Loan, there will be two properties at least, being used for security.
- In the event that the applicant does not pay for whatever reason and the lender wants to take action to recover the debt, the applicant’s house is sold first.
- It should be safe to assume that the house would realise a sale price, similar to the original purchase price.
- There may be a residual debt left over after the sale of the applicant’s property. And there may not be. It is all going to depend on a few factors. The questions you need to ask yourself are the following:
- Did the applicant have a deposit when they purchased the property?
- Did the applicant pay extra each week on to the home loan and reduce the balance substantially?
- Did the applicant consolidate smaller debts into the home loan? If yes, were the payments from the consolidated debts added to the weekly home loan payments? (We would have advised them to do this at the beginning of the loan).
If the answer is yes to even one of these questions, then there is a chance that after the loan is repaid there will be no residual debt.