Think carefully about going guarantor

The tradition of parents going guarantor for their children’s mortgages is fraught with risk, and those who are considering doing it should think very carefully before doing so.

While the urge to help family members get on often overrides the fears which might arise, it is important to assess risk to avoid credit problems – not to mention family tension – later in life.

Director of MyCRA Credit Repairs Graham Doessel said if a child defaults on a loan, the guarantor’s own property becomes at risk – sabotaging many people’s hopes for a debt and mortgage-free retirement.

“If parents have gone guarantor and their children do not make repayments, the creditor can place a default on the guarantors file which can hinder chances of obtaining credit for five years,” he said.

“Worst case scenario, is the bank begins to use the property the guarantor put forward as collateral, to recover lost debts. There is a danger the guarantor can lose their home.”

Currently 16 per cent of mortgage hardship claims are coming from people aged 60 and over.

This can be avoided by being savvy to the risks and thinking carefully about individual circumstances.

By far and away the most important question parents need to be asking is ‘could we make the repayments on this loan should our child be unable to?’ If there is any doubt of this, it may be best not to guarantee the loan.

Other questions potential guarantors need to ask are how responsible is the borrower, how stable is their employment, whether they have other means of repaying the loan should they become unemployed or fall ill.

If parents do decide to guarantee a loan, they should seek legal advice, insist children have life and income protection insurance, set a specific amount which would be guaranteed and ensure an end date to the guarantee period.

It goes without saying that they should also ask for a copy of all bank statements, so as to be aware of late payments.

Sometimes if a child has sworn blind to their parents that they can repay a loan, and then they find themselves struggling, they might not admit it straight away.

But the fact is, if parents know that the kids are struggling they can help – however, often they don’t know until it is too late.

We all want to help our kids out – but we need to ensure we are ok too. So dot the Is and cross the Ts. Talk to a solicitor first.

Any guarantee you give should be treated as a business decision not an emotional one.

Would you guarantee a loan for your children to buy a house?