Your thoughts on being a guarantor

[ak22]

Hi all, what are your thoughts/suggestions on being a guarantor to a first home buyer?

Situation:

My sister and husband are FHB, saved up massive deposit but lack the loan amount to buy a decent house in Levin (3 br stand alone house). Most homes are being snapped up so quickly and prices have increased.

My family: We have 2 properties. 1 own home in Auckland, 1 rental in Levin. Only my husband works in the meantime, 3 kids (imagine the costs, we're just surviving). My work ended early this year thus borrowing for another property investment is on standstill until I get back to work.

Based from calculation of 20% LVR and 40% LVR (IP), we still have 200,000 equity that can be used for deposit.

Is there a way that we can still become a guarantor for my sister to buy their first home?

Any way we can get around the bank/lenders on getting them to lend us for another investment property?

Cheers

[Nick G]

Hiya you should speak with a broker. There are a few on here, search for "Broker" at the top. A user called "Wellington Broker" is in their neck of the woods".

Edit: Rosco's advice is better. Get legal advice and understand your risk.

[Rosco]

Hi ak22,

First answer that springs quickly to mind is NO. Do you really want to take the risk?

Get legal advice about this, and I'm sure your lawyer will quickly talk you out of guaranteeing.

If you did go ahead, you need to make sure its not an unlimited guarantee! Again lawyers will help.

If you had millions and millions of equity, I would consider this. But for most people you should really be concentrating on what is best for you.

Ross

[Rosco]

(imagine the costs, we're just surviving).

Any way we can get around the bank/lenders on getting them to lend us for another investment property?

Cheers

Hi,

Just curious on the above comments. Do you really want to add to your risk by buying more rentals if your cashflow is tight?

What happens if your husband losses his job or has an accident?
What happens if interest rates go up?

Unfortunately most rentals with 100% debt are negative cashflow. So another rental could make your cashflow worse!

Ross

[Keys]

Have done it in the past. Would do it again at a drop of a hat with selected people.

1) Limit the guarantee to the required equity they need to finance the purchase.
2) Insist that they have a minimum of two loans. One interest only which is the large loan, the other P&I which is the small loan. (the one which you are guarantee for)
3) Insist that you have full, irrevocable rights to get monthly statements on all loans which they have connected to the property.
4) Remove yourself as guarantor as soon as possible.
5) Remember, you are still on the hook for two years following the removal of the guarantee.

[Wellington Broker]

Hiya you should speak with a broker. There are a few on here, search for "Broker" at the top. A user called "Wellington Broker" is in their neck of the woods".

Edit: Rosco's advice is better. Get legal advice and understand your risk.

Debatable

Seriously though better ways of doing this that avoid guarantees. If you were to borrow against your properties and lend them the money by way of a Deed of Acknowledgement of Debt is one option. Alternatively you could take an interest in the new property by way of a property agreement - multiple lenders will allow this at high LVRs if there is a party living in the property. My contact details are in my signature or you can PM me if you want to workshop options

[flyernzl]

I went guarantor for my (ex)wifes sister years ago, fortunately just for her power bill.

She defaulted and I had to pay up. Never again.

[donna]

Generous offer but I agree there's lots of funding options and a good broker will work out a deal for them. I'd also suggest getting back into work to increase your cash flow before getting another property but I'm more risk averse, others on here would disagree.

cheers,

Donna

[Perry]

Seriously though better ways of doing this that avoid guarantees.

Can we have some further suggestions, please? What security options could a person get if lending the money? One possibility to guard against might be a relationship break-up. I presume any such security 'instruments' would be reckoned on by the principal financier?

[brokerman]

Personally and professionally I'd advise 100% against. This is why the Responsible Lending Code came in, too many people got burned. If you want to assist then a 'gift' limits the liability and more importantly does not create a link between your property and theirs. I see the results every week and in the main they not pretty.

[ak22]

Hi Ross,

Thanks much for pointing out the risk involved. I have been thinking about it as well. How risky does it get? But then again, I think my risk will be minimised if I find a win-win situation for this case.

The IP we have is positive cashflow (though minimal, still positive). It's our mission to buy IP with positive cashflow. Had it fixed on 3 years interest, P + I. Hopefully, by the three years, rent would have caught up(currently, the rent tenants are paying are below the market value). It's more of a business partnering decision. Good tenants, why suddenly increase their rents.

Should we buy another IP to add to portfolio, we'd wait for a positive cashflow one still. We don't believe much on negative gearing.

[ak22]

Hi Welly Broker,

Hubby and I thought of just lending them the additional fund they need but because I'm out of work, top-ups are a bigg ??? right now from lenders, is it?

Will get in touch with you. =)

[Keithw]

In addition to the big fat NO, DON'T DO IT that has already been expressed above, there is another side to guarantees that was news to me when I heard it some months ago.
I was discussing options with the ASB for me helping my daughter to buy her first home using my properties as security. The guarantee option quickly became a no goer when the ASB pointed out that they cross guarantee, ie at the same time I am guaranteeing my daughters purchase, she becomes liable for all my liabilities as well !!!!!
This is an absurd situation, if she cant quite manage to finance a place on her own, there can be no way she could cover a default on any of my loans as well.
Maybe it is designed like this so that the banks dont have to take the risk with guarantees, but I am sure it is restricting a lot of fist home buyers.

I am keen to hear of other viable alternatives that can make use of equity, without having to raise extra loans that impact on cashflow.

[Bob Kane]

I was discussing options with the ASB for me helping my daughter to buy her first home using my properties as security. The guarantee option quickly became a no goer when the ASB pointed out that they cross guarantee, ie at the same time I am guaranteeing my daughters purchase, she becomes liable for all my liabilities as well !!!!!

I don't see the problem with this. It wasn't something I'd expect but I can't think of any problems with it.
Do you have a few high risk liabilities?

[Bobsyouruncle]

I'm not sure if the banks will still do it but last year we put a deal together to help a child into a home by buying the house well under valuation and selling to to her at valuation. We left the difference in which covered her deposit and she borrowed the balance. Eliminates any guarantees. You could of course do this for a child even if you didn't have a margin. You are only exposed for whatever you have left in the property to make the deal viable for the bank.