Decreasing housing affordability is forcing many families to investigate guarantor loans.

Guarantor loans allow a family member – typically a parent – to use the equity in their own home as security for another family member’s loan.

With the disappearance of 100% LVR loans, guarantor loans have become the last bastion for borrowers without a deposit. Typically these loans allow individuals to borrow more than 100% of the purchase price, which in turn allows them to buy the home and cover purchasing costs such as stamp duty at the same time.

While these types of loans are extremely helpful to first home buyers, they are not without risk to the guarantor.

Should the borrower fail to make the mortgage payments, the guarantor will ultimately be responsible for covering the loan.

According to Matthew Bransgrove, partner at Bransgroves Lawyers, there have been an increasing number of cases involving guarantor loans ending up before the courts.

One commonality between the cases is that often the parents, or guarantors, lack financial savvy and did not fully comprehend the loan arrangement.

But is there a way to limit your risk as a parent, but still help your children achieve the dream of home ownership?

Consider these tips before signing the dotted line:

Seek legal advice: Most lenders require guarantors to sign a statutory declaration confirming that they have sought independent legal advice. While this is usually done prior to settlement, you should consider sitting down with a lawyer at the time of the application and again when the loan offer has been issued. That way, should you decide not to proceed with the arrangement after the initial meeting then you won’t be leaving your child in a lurch, unable to complete their purchase.

Educate yourself: Ask your mortgage broker or lender to fully outline your responsibilities as a guarantor so that there will be no surprises.

Meet separately: You should not feel pressured to sign a guarantor loan. If you’re unsure about making the commitment, arrange to meet with your mortgage broker or lender without your kids. That will help take some of the emotion out of the transaction and encourage you to focus on the loan details.

Be honest with yourself: Are you sure your child can handle the loan repayments? Often parents are much more capable than lenders of judging whether their children are good credit risks. Maybe they are not ready for the commitment now, but you could leave the door open for a future arrangement.

Plan for a worst-case scenario: Sometimes, through no fault of their own, borrowers find themselves unable to make loan repayments. Are you in a financial position that will allow you to cover them should this happen?

Discuss insurance: Insurance could save both you and your children financial hardship should they suddenly lose their jobs or become ill. Perhaps getting insurance could be a condition of you signing the loan.

Discuss an exit strategy: Parents may only have to act as guarantor for the first few years. As the value of the property increases and the children pay down their loan, parents should be able to withdraw their support. This then frees up the parents to consider other options for the use of their property equity – such as their own investment purchase.

Consider alternatives: Perhaps a monetary gift to cover the deposit would be a better option for you acting as a guarantor. In most cases a gift of 10% of the purchase price is sufficient to allow the borrower to qualify for a loan on their own. This option is suitable for parents who are in a strong financial position or who are not comfortable providing a guarantee secured by a property that they own.