Loan Tip: Parental Guarantees involve Cross Collateralising Securities

Generally, the word on the investment street is to avoid cross collateralising securities for loans.

This is generally a good position to take. But there is one case when cross collateralising securities is unavoidable and that is with parental guarantees.

When a parental guarantee is used both the parent’s house and the adult child’s house will be mortgaged to the bank. This is cross collateralising securities as there are 2 securities for 1 loan.

Is this a bad thing? Yes, it is, but paying LMI or not getting the property can be worse.

It is best to structure things to avoiding parent guarantees – but if you cannot do that you might have to use a parental guarantee and just get the guarantee security released from being used as security as soon as possible.


Example

Young Bart is about to get his first property. He has high income but no deposit because he spends all his wage on sneakers and coffee so he asks his parents to let him use their property as security so he can borrow 100%.

Homer and Marge’s property will be security for the loan as well as the new property owned by Bart.

One loan with 2 securities – the very definition of ‘cross collateral’