Just because you’re in the fortunate financial position of being able to sign surety for someone doesn’t mean you should necessarily do so, says Shaun Rademeyer, CEO of BetterLife Home Loans, SA’s largest bond originator.
You could be asked to stand surety for a friend, a relative or an adult child to help them buy their first home and you may feel that it would be a kind thing to do, but you should be very cautious, he says.
“Signing surety basically means that you are using your good credit rating for someone else’s benefit – and undertaking to extend your credit on their behalf too if necessary. If they default on their debt, the lender will be looking to you for all the missing funds, so you are in effect signing a deal that says you are a co-borrower.”
However, he says, there are ways to reduce some of the liability that this implies, bearing in mind that signing as surety for someone is essentially a business deal and should be treated that way. These include:
– Obtaining a full credit record from the person who is asking you to stand surety for them, so you can gauge whether they are good at managing their money and paying their debts on time. If their record is not good, your risk will be significantly higher.
– Establishing how your own credit record will be impacted. If you sign surety on a loan it will need to be disclosed when you apply for any new credit yourself – and it could result in you being turned down.
– Establishing how much your “partner” is able to put down as a deposit. Your risk will be lower if they have a chunk of their own money at stake.
– Getting a qualified attorney to draw up a proper written contract detailing the terms of your agreement.
– Defining your exposure. Does the surety cover all costs associated with the property including property rates, municipal services and insurance, or just the home loan repayments?
– Putting a time limit on the surety. It should terminate when the home loan balance is reduced to a certain amount, for example.
– Defining what will happen if and when the property is sold. Will you be entitled to a percentage of the profit? Will you have to pay part of the estate agent’s commission?
And finally, says Rademeyer, you should insist on up-to-date copies of all financial documentation relating to the property, including home loan statements, municipal bills, and invoices for repairs and improvements.
“In short, standing surety can be a wonderful gift to give someone, but you should not do it at the expense of your own financial future or if it makes you feel uncomfortable in any way.”