Can lender take unencumbered property?

Discussion in 'Loans & Mortgage Brokers' started by Bodhi17, 5th Sep, 2017.

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  1. Bodhi17

    Bodhi17 Member

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    Hi

    I currently have a $30k loan on my $1.1m property and want to draw $200k in equity for renovation. Problem is that my mother in law is on the title with my wife and I.

    In order to do the cash out with BOM, I had to go see a solicitor with my mother in law to discuss the risks. She was told that there is a possibility that the bank could take her own unencumbered property (not being offered as security) if we default on this loan. Now she is scared to go ahead.

    Is that true? Can a bank take a guarantor's unencumbered property to repay the debt even though it's not offered as security? I have heaps of equity in my home to repay the debt but now my mother in law is stressed about potentially losing her home.
     
  2. Scott No Mates

    Scott No Mates Well-Known Member

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    Do you understand the role of a guarantor? This person agrees to pick up the debt in the event of the default of the mortgagor. So if your MIL goes guarantor for you, you fail to pay, the bank goes after her assets. Watch ACA and the sob stories of the child gone off the rails, parents losing house etc because they went guarantor.
     
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  3. Bodhi17

    Bodhi17 Member

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    Yes I understand the role of the guarantor but she is on the title so she could be an applicant or guarantor.

    What I didn't realise is that a bank can force you to sell an unencumbered property to pay off the debt from an unrelated loan. So if that is the case, why the big deal about keeping everything uncrossed if a lender can take your unencumbered? I know there are many other benefits of having them uncrossed but I thought a big component was to keep the security away from the bank. Just like how the advice on here is not to have two properties with the one lender due to the all money clause.
     
  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    Yes its true. but unlikely.
     
  5. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    Because the property is not used as security so this would buy time to sell without the bank's direct control.

    The bank could only take your MIL's other property after getting a judgment against her. But rather than do that they would just take the property mortgaged in most cases.
     
  6. Username86

    Username86 Well-Known Member

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    If its your property with the MIL on the title could you do a refinance and buy her share out?
    You appear to have plenty of equity there..
     
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  7. Bodhi17

    Bodhi17 Member

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    Thanks Terry

    Think this will cause more problems trying to determine the price of property and having serviceability for the bigger loan.

    I will try to explain to her that they will take this property first before touching anything of her unencumbered properties. Thanks for the responses.
     
  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    you had better put a 'probably' in there!
     
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  9. Bodhi17

    Bodhi17 Member

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    Yes always a good idea to put 'probably' in anything legal. Not trying to take advantage of the MIL just wanting the right amount of worry apportioned to the risk.
     
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  10. Marg4000

    Marg4000 Well-Known Member

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    The bottom line is that the bank will do everything they can to get their money back. Having a mortgage over a property simply makes it easier for them. In the event that is not sufficient, they will go after other assets.

    And if they think MIL is an easier target, she may be first in the firing line.

    As suggested, buying her out may be a good option.
    Marg
     
  11. Blacky

    Blacky Well-Known Member

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    You should try to negotiate with the bank to have the MIL provided a "limited" guarantee. And ensure that the guarantee is limited to the specific property, not the loan amount.

    Generally banks dont like these guarantees and wont accept them - esspecially retail.

    However, they are possible.
     
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  12. tobe

    tobe Well-Known Member

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    Just pay a solicitor and financial adviser to give her specific advice. If she is a guarantor this is mandatory with most lenders in any case.
     
  13. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    Sounds like that is what has happened already
     
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  14. tobe

    tobe Well-Known Member

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    I need to pay more attention.
     
  15. Stoffo

    Stoffo Well-Known Member

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    Shouldnt matter whom is on the title, so long as they all sign to redraw the amount .....
    This sounds more like a serviceability issue, as the property value should cover that amount of redraw (18% lend).
     
  16. Username86

    Username86 Well-Known Member

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    I think getting the signature is the issue
     
  17. dabbler

    dabbler Well-Known Member

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    If you do not pay, bank can take whatever is encumbered & then, if shortfall, go after anything else you have of value, including other real estate.

    So, yes, they advised her of the risk, but they also maybe should have explained that there is so much equity in your 1 mil property, that it is nearly impossible that the loan could not be recovered with cash left over.....
     
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  18. Bodhi17

    Bodhi17 Member

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    English is a second language for her and she is naturally a worrier. After some further discussion about it she now understands that the encumbered property would most likely be sold first and there is more than enough equity there to pay off the small debt. Thanks for all the feedback and my MIL can now sleep a bit easier.
     
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  19. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    Yes a guarantor may be a faster and easier way to access loan security in event of default. Its unlikely however since banks HATE guarantors as it gives bad media. But its still a risk. What mum cant be assured of is that you dont borrow against the $1m further so it ends of highly leveraged and exposes her to the guarantee.

    I know of two cases I have seen where clients have guaranteed a child debt and they have been smacked by the lender. One was minor and another was aweful. Child defaulted on heavily mortgaged property with equity shortfall. The bank forced sale of the parents home to access something like $200K since the parent couldnt satisfy lending criteria as they were retired.

    Bank delayed and delayed to avoid it but in that time the debt grew and grew and the parent was stuck with it.

    Options :
    - Mum has equity she may be able to provide a fixed guarantee for $200K against her home.
    - Limited guarantee (some lenders)

    It is harder if parents arent working etc

    If MIL is on title why do they want more security ? I would have thought the existing title is well covered.


    Home Loans with a Family Guarantee | finder.com.au
     
  20. Scott No Mates

    Scott No Mates Well-Known Member

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    Is there a secondary market for used MIL?
     
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