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By Grant Clifton, Countrywise Financial
With the Reserve Bank rules now firmly in place requiring a minimum of 20 per cent deposit for a house purchase it has become quite common place for parents, grandparents, employers or even friends to go guarantor for a loan to enable a house purchase to be made.
This can be a complex and very sensitive subject, which really requires expert advice, legal advice and a good understanding of what you are being asked to sign.
In short, sometimes a bank will only provide credit to a customer if someone else provides a guarantee. If you agree to be a guarantor for a borrower, the bank can require you to pay the borrower’s debts if they default on their repayments. However, guarantees can be complex. Please seek independent legal advice if you are considering becoming a guarantor and are not pressured into signing something you are not fully comfortable with.
Recent changes to the responsible lending code have put in place some safeguards which can stop a lending proposal going ahead unless the lender is fully satisfied that the borrower and guarantor can meet their obligations (loan payments) without hardship. There are numerous ways in which a guarantee can be used effectively to assist someone. In the case of a house purchase it is only natural to want to assist your children buy a house. In this case I recommend you talk through how much you will be guaranteeing, how much the loan payments will be and ensure that the payments are affordable by reviewing a budget together. Where possible limit the amount of guarantee to the smallest amount you can, so if the kids have a 10 per cent deposit, make sure that your guarantee amount is limited by the bank to the other 10 per cent the bank requires. Where possible it is preferable to borrow the money yourself in your name, so you can monitor the payments and get a statement from the lender to see how the payments are going. If you just sign a guarantee for a loan you will not get a loan statement and will have no idea if payments are being made on time.
Most guarantees are unlimited in amount and guarantee ‘all obligations’ of the borrower. This means the debt you guarantee may include lending that exists at the time the guarantee is provided, plus all of the borrower’s obligations to the bank on an on-going basis. This could include further lending, credit card debts and overdrafts. You can ask for your guarantee to be limited to a specified amount, but the bank does not have to agree to the guarantee being limited. No limit, don’t sign!
Guarantees can work well, when everyone understand their obligations. For further info, speak to your advisor, lawyer or visit the banking ombudsmen website, bankomb.org.nz
