Personal guarantees for family members

A number of parents are supporting their children into home purchases by providing personal guarantees for a sum sufficient to give comfort to the lender.

Parents are optimists and confident their exposure will be limited in both amount and time because of undying faith in their offspring.

Usually the children are in relationships themselves so the couples are committing equity partly on behalf of someone they may not know or necessarily even like. Again blind faith will usually overlook any concerns about this issue.

Even though the guarantee may never be called upon it is still regarded as a debt in the amount of the guarantee for the purposes of a credit reference, much like the unused balance on your credit card.

A default by the borrowers even on one payment may have a negative affect on the credit worthiness of the parents even if they may not be called upon to make up the default.

The guarantee also provides a brake on the flexibility of the guarantors. The sale of the guarantors home will be a matter of concern for the lender to the children and may require the guarantors to provide alternate security if the child’s loan is to remain in place. The ability of the guarantors to ‘trade up’ may also be limited while the guarantee remains in place. Remember the lender does not reduce the maximum liability under the guarantee in proportion to the increasing equity on the child’s property so it is important to get out as soon as you can.

So take some time to consider the consequences of entering into a personal guarantee- it may be more of a burden than you realise.