The banking ombudsman is warning people to be wary of what they commit to when it comes to guaranteeing someone else's borrowing.
Deborah Battell said new limits for low deposit home lending had sparked suggestions of an increase in people becoming guarantors for home buyers.
Battell said her office encountereda low but consistent level of disputes around guarantees and a common problem was that people were often not fully aware of the financial impacts if the borrower wasn't able to make payments.
"More often than not, a guarantee arrangement can work well, and is a useful financial tool. But our experience dealing with guarantee complaints and disputes is complainants may not have been fully aware of the negative impact a guarantee can have on their own finances in the event the person whose lending they agree to guarantee gets into financial strife.
"Unfortunately, ignorance is not a defence and we have seen guarantors find themselves in dire financial straits themselves, which is all the more distressing given their good intentions."
Battell said parents wanted to do right by their children by helping them out but she said it was important to be realistic about whether their son or daughter could repay the loan.
"I think family lending can often be problematic."
Battell said potential guarantors should get independent legal advice and consider talking to the bank about limiting the amount of the guarantee before making a commitment.
Battell said before becoming the ombudsman she had not been aware that banks could call on guarantors to cover any debt including a credit card and future borrowings.
If there are multiple guarantors the bank can also chose to focus on one if they believe that person has the means to pay up.
Guarantors can also have money taken out of their account if they bank with the same bank where the person is borrowing the money and they default on the loan.
Battell said it was useful for the person borrowing to know what they are asking their guarantor to commit to.
"It's a huge responsibility on the borrower to make sure they don't put a friend's or family money at risk."
