A step-by-step guide for Parents who are acting as Guarantors
With today’s property prices, first home ownership is becoming harder and harder to achieve.
Too often, we’re finding that parents want to help their children achieve their home ownership dreams, but are worried about how it may affect them financially. The risks appear to outweigh the benefits and parents are left in a do-or-die situation where they feel responsible for helping their children financially.
The questions and concerns surrounding the possibility of future divorce, job loss or injury cloud the minds of potential guarantors, leaving them in a vulnerable position when signing the bank papers.
‘What if the borrower loses their job?’ ‘What if they can’t make the minimum loan repayments?’ ‘What happens then?’
‘Where does that leave us?’
The theory dictates that this situation leads to the Guarantor having to find the money to pay for the amount in arrears, before their security property is sold to repay the debt. Often, this also means that the financial future of the Guarantor is uncertain, as they are faced with having to delay their retirement, while dealing with undue financial hardship… not to mention the overall tension within the family.
It’s a devastating situation that leaves all parties out of pocket, and is something that can be easily avoided. Here’s how:
A simple, no-frills income protection policy can help to reduce risk. If a child can work and, adequately repay the loan, there is every opportunity to make repayments and continue to do so should any unforeseen circumstances occur.
Recently, we had a case where parents who were acting as their son’s Guarantors paid for his $500 per-year income protection to ensure the mortgage was looked after until he had enough equity to refinance them out. It was a great back up plan that helped to minimise risk.
If death was to occur, a life insurance policy on the child that is owned by the parents can help extinguish the child’s debt. This includes debt on the family home, and avoids any ‘son or daughter in law’ issues that may arise from such circumstances.
Parental Guarantee Strategy; they’re a great idea but, like most things in life an exit plan is needed.
To find out more, contact Partners in Planning.
*Any advice in this publication is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information.