Everything will work out fine. Or not.
If your child has their heart set on a home, but the mortgage will stretch their earning capacity, you may be able to assist them by acting as Guarantor on all or a portion of their mortgage. While this is very common, it does carry certain risks. And every parent should be aware of their obligations before signing on the dotted line.
In our last blog post, we discussed ways parents can help their children identify the right property to buy. In this post, we’ll look at some of the pitfalls around acting as Guarantor, as well as the tools available for reducing those risks.
1. Always consider the downside.
Many lenders will allow you to use your home’s equity to Guarantee all or a portion of your child’s home loan. Without having to outlay cash, your child can borrow more money, buy the house of their dreams and live happily ever after. Maybe.
Getting parents to act as Guarantor has become such a popular way for first home buyers to enter the market, that many lenders have specific lending products set up for this purpose. Of course, the relative simplicity of the Guarantor process probably doesn’t reflect the full risk that many parents take on.
If your child defaults of their payments for any reason, you will be required to cover the shortfall. And if you don’t have the cash on hand to cover payments, your own property may be at risk.
2. Protect yourself at all times.
The words ‘life insurance’ conjure up all sorts of emotions in Australia. It’s not something that any of us really want to spend money on. And its end purpose is not something most of us want to think about. But deep down, we know we need it.
Life insurance is an affordable way to ensure that, should the unthinkable happen, we leave our money to our children – not to bankers. When considering the question of how you help your kids (or grandkids) get into the property market, there are two key areas you should be thinking about:
3. How can you protect yourself?
It is sensible for people acting as Guarantor for their loved ones, to look at taking out an insurance policy with their children as the ‘life’ insured. This kind of protection takes money out of the equation if life throws your family a curve ball.
There are two main risks you need to protect yourself from when helping your children into the property market:
• Economic: Business downturn, job loss or redundancy
• Health: Sickness, disablement or passing away
While the economic risks need to be considered, the health risks are more easily managed through good life insurance. Dealing with the financial consequences of a car accident or a work accident for example, can all be mitigated through the right protection.
4. What options are available?
There are several types of assistance you can purchase:
• Critical illness / trauma assistance – A lump sum is payable if suffering a critical illness such as cancer, heart attack, stroke, etc
• Disability assistance (permanent and temporary) – A lump sum and/or regular income is payable upon disablement
• Death assistance – A lump sum is payable upon death
Basic insurance cover on a male in their late 20s might only cost $20 per month. This would approximately cover Death and Disability assistance of $200,000.
Comprehensive cover for the same person might cost $80 per month. This would also incorporate critical illness assistance (much more common).
5. How can your loved ones protect themselves?
It is generally accepted that taking on a mortgage is a sensible time to review insurance. It’s also reasonable to expect your children to shoulder some of the responsibility by protecting themselves. Particularly, if you’re helping them get ahead.
Your children should be looking beyond what they have in super and making sure that if anything were to happen, expenses would be met and houses wouldn’t need to be sold.
Seeking insurance while loved ones are young and likely to have a clean bill of health, will make it more accessible and affordable.
6. What else do I need to know?
Not all insurance is good insurance. Professional financial advisers will introduce you to a life insurance company that will do a full medical questionnaire prior to offering the cover. This is of paramount importance if you wish to receive the benefit at claim time.
These days there are plenty of low quality options around. You can buy them off the television, internet, as upgrades to your health insurance and credit card. Beware of this type of cover. What good is it if it doesn’t protect you adequately when something bad happens?
What to do next?
Contact xseedwealth and we’ll help you plan your approach to get you the best coverage. We can survey the market and tailor cover to your budget and needs.
For more information email or give us a call to speak with one of our financial fitness advisers.