Ian and Nola’s daughter Nikki was looking at buying her first home with her partner, Tom.  Given that Nikki and Tom had very little equity to contribute to the purchase, Nikki’s bank requested that Ian and Nola provide a guarantee over Nikki and Tom’s borrowings of $400,000 with the bank and put a mortgage over their own freehold property.  Ian and Nola trusted Nikki to repay the mortgage so agreed to this arrangement.

When they went to see their lawyer to sign the guarantee and mortgage, it was pointed out to them that they could ultimately be forced to sell their own property if Nikki and Tom defaulted on mortgage payments if they did not have enough cash to repay the mortgage.  Although they had about $275,000 of hard earned retirement savings, they did not have enough to repay the entire mortgage so were very concerned that their family home could also be at risk.

There are other ways to help out your family to buy property without the need for guarantees and mortgages over your own property.  For instance Ian & Nola could have made a loan to Nikki and Tom (recorded in a loan agreement) that would have helped them get their loan from the bank without the need for Ian & Nola to enter into a separate guarantee and mortgage themselves, and so limiting their exposure.  There are many options and you should talk to your lawyer about them before signing up to anything.