William Shakespeare is the most quoted writer in the English language, not just for his beautiful turn of phrase, but for his words of wisdom. Wisdom in many cases worth listening to more than 400 years later. Sometimes his wisest words were spoken by his plays’ biggest fools. Polonius in Hamlet tells us “To thine own self be true”. He also tells us; ‘Neither a borrower nor a lender be.’
But what about being a guarantor? Is it a foolish path to go down?
Getting a foot onto the property ladder is notoriously difficult and getting harder each passing quarter. Whilst interest rates may be at historic lows, lending conditions are more stringent than ever. Saving enough money for a deposit can prove to be prohibitive for many, especially first home buyers.
What is the solution? For a lucky few, the solution lies in the “Bank of Mum and Dad” – a private arrangement whereby parents lend or gift the deposit. Being able to lend or gift your children the money for a deposit is a wonderful position to be in. But not everyone is in that position, or willing to so. So, what’s next?
Guaranteeing a loan sounds like an incredibly magnanimous thing to do for struggling or starting out member of the family. And it is, but it should come with a warning….
When you become a guarantor, the bank has the right and is in the legal position to pursue you for the FULL amount of the loan. In situations where there are several guarantors, the banks have a tendency to target the guarantor with the most assets. Your private home and your personal assets are all subject to the guarantor agreement.
So, if you have guaranteed your son, daughter or family member’s loan and the unexpected happens – like a pandemic hits the world and they lose their jobs – it helps to know that you could be liable for the loan in its entirety, even if it leads you into bankruptcy.
This doesn’t mean it’s a fool’s game to play… it simply means, it is advisable for every party to seek independent legal advice before entering into any binding guarantor agreement.