The risk in considering the needs of the next generation.

                                                                                         

All responsible parents will do their best to guide their children’s progress
through their earliest days, the first steps in education, teenage difficulties and so on. Various challenges will present themselves and will have to be overcome with careful consideration of the circumstances, but none of the first problems should present any danger for the parents themselves. In due course however this situation could well change, especially when financial matters come to the fore. The risk may well first manifest itself in the form of a requested loan of perhaps quite modest size, which is forgotten once granted and all hope of repayment slips away. This need not be too traumatic and it may well provide a useful warning for any future dealings regarding the needs of your offspring.
Then comes the almost inevitable time when far greater expenditure is involved. It is more than likely that requests at this time will relate to a need for a form of transport, or the far greater danger of housing costs. It can be difficult to avoid the importuning of a son or daughter who is asking for some assistance in the purchase of a flat or even a house, and few would blame the parent who does their best to help in these situations. However, a seemingly innocent request may be made which you feel it would be churlish to refuse, but which although apparently cost free, may well lead you into a position of having significant debts. If you are asked to consider a guarantor mortgage you need to hold back and give yourself time to examine the implications very carefully indeed.
It is likely that the child making the request is unaware of just what can be involved, as the idea appears to be very straightforward. It involves the child’s income being enhanced by the use of the income of the parent or responsible relative, to increase the amount which the child can borrow. This may not even have any particular significance in the loan details, being included in the loan provider’s standard underwriting procedure. So the scene is set for the parent’s earnings to form part of the agreement, not as a joint mortgage, but with their signatures confirming their total and guaranteed preparedness to

cover the entire mortgage if necessary. This commitment has to be proved to the lenders entire satisfaction, account having been taken of other liabilities including their own mortgage commitments. The amount of such liabilities will be taken from the amount which the lender is prepared to provide, which is likely to significantly reduce the amount available for the child’s mortgage. With these hurdles cleared the loan can go ahead, carrying with it the very useful fact that as the parent’s names are not included on the mortgage they have no claim of ownership of the property and so no capital gains tax is involved. There is however a downside for the parents, because the guarantee which they have provided will be taken into account in any future attempt by them to take out a new loan.
So the agreement goes ahead, the child gets the mortgage which they wanted and everything is fine – but only so long as the child can continue to service the mortgage. We appear to be inexorably approaching a period of higher unemployment, so what happens if the child loses his or her job? Or worse still, if child and parents become unemployed? The agreement which has been made is relatively straightforward – if the signatory to the mortgage cannot meet the payments, then the guarantor has agreed to do so. If that money is not available from either source, then if the guarantor’s house has been used as security it may have to be sold. Unfortunately negative equity, that old enemy of the house buyer, is surfacing again. This is the situation where the value of a property falls to a point where it is less than the debt which is owed against it. The guarantor parents could find themselves in a very unpleasant position financially.
Matt Morris of Lifesearch who are independent advisers says that insurance is vital and that income protection with unemployment cover should provide a comprehensive safety net which at an affordable cost would safeguard payments due.
The warnings are not to be taken lightly. Any move towards a guarantor mortgage must be considered in every detail and expert advice should be taken before entering into the agreement if life changing problems are going to be avoided.

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