Dear July,
Lending money to relatives is always difficult.
Generally I agree with the Cashflow Game card "Never lend money to relatives". However when emotion comes into play being a son or daughter it can become a grey area. But the reality is you must make it less grey otherwise you may pay for it in the end.
Important to go back to:
What do you want to achieve through this?
Why is the family member having difficulty getting the loan?
-LVR (Loan valuation ratio) - Not big enough deposit for the property in question?
-DSR (Debt servicing ratio) - Unstable work history, short-term employment or too big a loan to service?
LVR
If he does not have a big enough deposit then you need to make sure that he has some committment to this. The concept of "hurt" money is real as if it was not your money in the first place it can be easier for a person to loose with less responsibility...... However if you want to proceed limit your risk by arranging a deposit loan to him with him paying all the setup costs. Then your risk is only up to the deposit amount if you are comfortable doing this.
DSR
If the problem is that he can't borrow enough money by himself maybe he should be looking at a less ambitious property. It can be easy for someone to live beyond their means at someone else's expense. With employment still being in a probation (3 month) period the simple thing is time.
Find out what the difficulty getting the loan is. By knowing this you can then know whether this will become a short-term or long-term fix.
Personally if it is an issue with something related to servicing the debt (DSR) then I would look long and hard at the reasons. There are many "lo-doc" loans thesedays. Otherwise you are at a greater level of risk. With it just being a deposit related issue (LVR) then I would still want him to have some "hurt" money however would be willing to do up a legal loan at a higher interest rate for the rest of the deposit.
Simply going as guarantor without knowing the reasons is not as simple as it sounds. As Glenn said I do not believe that your risk is limited to one third and your potential risk is greatly amplified.
For more information I would suggest that you talk to Rolf or Richard. They could look seriously at the situation and see whether your family member could qualify for a lo-doc loan without you being involved at all. In the case that they are not successful they could give you constructive input on how your could setup your deposit loan and whether this could be a viable alternative.
Try to keep it black and white. Grey areas cause us to make financial mistakes....
Cheers,
Sunstone.
