20 Feb Parents Mortgaging their home to guarantee their kid’s first home loan
A recent article titled ‘‘My life is shattered’: Guarantor warning as Sydney man forced to sell his mum’s flat to pay out ex-wife” posted by news.com.au serves as a reminder of the risks that can occur for parents who use their home as security for their son or daughter’s loan. In this case, the mother’s house may have to be sold with half the proceeds to go to her son’s ex-wife.
Most banks today will typically require a 20% deposit for a home loan, which can be a significant hurdle for first home owners. Many banks will reduce the deposit required provided that you receive additional security – this often comes from parents. The child’s current income is important to the payment of the loan of course, but it is not the only factor. Detrimental events can occur, for example:
- A new business or project not succeeding.
- The loss of their job.
- Unexpected events such as gambling addictions.
- Permanent physical impairments caused by strokes or car accidents which lead to significant on-going medical expenses.
- A change in bank policy which may result in the bank forcing them to refinance.
- A sudden drop in the value of the child’s house.
When such events occur, the guarantor may lose their home and independence, or their son or daughter may lose their home and the parent may be left with no option but to support them again. The financial situations can also place a large emotional strain on relationships.
When banks foreclose on a loan and repossess homes, they will use reasonable endeavours to get a market value. Their primary concern, however, is to recover the loan, and there may be issues if there has been a drop in property valuation.
Personal guarantees carry significant risk. Make sure you are not feeling pressured by either your lender or your family members if you are asked to provide a guarantee or use your property as security. Remember that banks assess the borrower’s ability to repay the loan. If you have been asked to provide a personal guarantee, this should sound a warning to you that the bank has concerns about the loan as well.
If you are a parent in this position, consider asking your son or daughter to wait an extra year (or even longer) to enable a better deposit without having a mortgage placed over your home. This may result in your child losing out on that dream home for now, but it will reduce the chance that you could both lose your homes if a significant event occurs.
At Belperio Clark Lawyers our commercial team have years of expertise advising clients on loans, asset protection and planning against contingencies. We can help you to better understand your options, and advise you on whether structuring your estate differently may provide you with better protection.
Call us on (08) 8212 1322 for advice in relation to your loan or estate.