Why You Need To Be Careful While Going Guarantor For A Loved One
On my Ask Kochie Facebook Live session last week I had a question from a loving mother wanting to help her son 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.
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 a relative money then why should you.
But if you have to go guarantor make sure you take steps to limit your risk:
– Make sure as the guarantor you seek independent advice. Don’t get emotional and be liable for a debt you can’t afford.
– 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.
– 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.
– 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.
– Don’t sign up for unlimited guarantee. Make sure there is an upper limit on the guarantee which you agree with.
– Do a deal with the borrower that when their equity grows with the increasing value of the property that your guarantee is cancelled.
You might also like to read: Six ways to manage mounting debt