On one of my Ask Kochie Facebook Live sessions I had a question from a loving mother wanting to help her child buy their first property by going guarantor on the son’s mortgage.
It is a really nice sentiment and something a lot of parents do to help.
BUT… be careful about being guarantor for anyone.
Going guarantor sends a shiver down my spine at the best of times. I have come across hundreds of examples where the very best of intentions in going guarantor has led to financial disaster and emotional heartache. It’s something that you don’t wish on anyone because not only do people lose their house but, inevitably, it tears their family apart.
More on this: The perils of going guarantor
Harsh, but true
Taking responsibility for your own debts is one thing… taking responsibility for someone else’s debts can be just plain stupid. I don’t mean to be harsh but it just isn’t worth the heartache.
Going guarantor for someone can be risky at the best of times. Basically it is making a commitment to the bank that you will pay off someone else’s debt if they can’t. This may be all right if you are certain the borrower is going to make good the loan, but if they are not, remember you could be left holding the entire debt.
Banks have a pretty strict process when it comes to lending money for property or a business. You have to ask yourself that if a bank, with all their due diligence, won’t lend your relative the money then why should you?
WATCH: Julie Lee from Burman Invest explores how the perception of risk affects our investments:
If you can’t get out of going guarantor…
If you absolutely have to go guarantor, make sure you take steps to limit your risk. Here are my top tips:
1. Seek independent advice
Make sure as the guarantor you seek independent advice. Don’t get emotional and be liable for a debt you can’t afford.
2. Treat it as a financial transaction
If you can’t pay the debt don’t sign the paper. Remember there are no friends in business and family should also be treated with caution.
3. Be there at signing
Do not entrust the document to the borrower for signing. You should be there with the borrower to watch all is in order. As guarantor be there at the signing in case your signature miraculously appears on a document you have never seen.
4. Read everything carefully
Above all, understand what you are getting yourself into. Even when you are sitting in the lender’s office, do not sign your life away without reading the documents carefully. Don’t be afraid of taking time, even if the financier and friend is pressuring you to hurry up. A few minutes before you sign may save a few years of regret afterwards.
5. Insist on an upper limit
Don’t sign up for unlimited guarantee. Make sure there is an upper limit on the guarantee which you agree with.
6. Build in a way out
Do a deal with the borrower that when their equity grows with the increasing value of the property, then your guarantee is cancelled.
You might also like to read: Six ways to manage mounting debt