Loans Guaranteed by Family Members

Discussion in 'Loans & Mortgage Brokers' started by MTR, 24th Nov, 2016.

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  1. MTR

    MTR Well-Known Member

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    Just got this email (Steve McK)

    NAB and Westpac just confirmed this week that loans guaranteed by family members are growing faster than every other segment of the market.

    Parents seem to have no fear in agreeing to cover a shortfall in their children's loan payments. After all, our housing market is impervious to corrections, right? Who cares if the bank says our kid can't afford a loan!


    I think its a sign of the times, We have these amazing booming markets in Sydney and Melb where people are making pots of money, now they want their children to do the same.

    While interest rates remain at historical low I don't see an end in sight at the moment. I have already taken money off the table, perhaps too early? ....
     
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  2. D.T.

    D.T. Specialist Property Manager Business Member

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  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    But is it true?

    I think you will find this is a security guarantee and not an income guarantee. Indirectly the parents would be agreeing to cover the shortfall in the children's loan repayments, but they are not specifically guaranteeing this. They would be letting one of their properties to be used as additional security.

    I don't think many lenders allow income guarantees anymore.
     
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  4. Brady

    Brady Well-Known Member

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    Agree with @Terry_w not providing loans they can't afford (serviceability)- just loans that they don't have the deposit/equity (security).
     
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  5. Corey Batt

    Corey Batt Well-Known Member

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    Just another reporter who doesn't have a clue what they're writing about. Guarantees being provided are for SECURITY guarantees, not SERVICING guarantees. This means the borrowers have less deposit than required, or have a deposit which is in LMI territory and the family is happy to help provide additional security for the children initially so they can avoid any LMI charges.

    Guarantee's are an important and practical way for many to buy their first properties. It can help reduce their effective loan amounts and enable borrowers to put *more* of their savings towards the purchase instead of in the banks pocket. We write these in the office quite often for both owner occupiers and investors - with the correct structure and advice it can be an effective tool which doesn't need to put the parents in undue risk.
     
  6. Jess Peletier

    Jess Peletier Mortgage Broker & Finance Strategy, Aus Wide! Business Member

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    Yup - parents aren't guaranteeing repayments, the kids still need to prove that they can afford the loan. The bank says they CAN afford a loan. The guarantee just means they can borrow the full cost plus stamps, not that their parents are chipping in cash to cover a shortfall every month. :rolleyes:

    Reporting at it's best.
     
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  7. MTR

    MTR Well-Known Member

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    Looking at the median house prices of Syd and Melb I expect many parents will need to chip in
     
  8. larrylarry

    larrylarry Well-Known Member

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    I will definitely be chipping in in the future.
     
  9. albanga

    albanga Well-Known Member

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    Yep yet another article written with no idea to fuel the uneducated masses.

    A security guarantee is a great thing that allows a child to get into the property market whilst still having the capacity to pay for the loan on their OWN income! It's not like mum and dad are working and giving the child money to make the repayments, pretty sure no lenders calc takes into account money for washing the dishes at home.
     
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  10. JM investor

    JM investor New Member

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    Even giving security can be a risk. I know a guy whose investment loan went belly up after a divorce and his old man (retired) had g'teed the loan 5 years ago. Now the old man is at risk of losing his home. The son is very distressed about this.
     
  11. wylie

    wylie Moderator Staff Member

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    It is important to limit the guarantee. We did this for our oldest son so he didn't have to pay LMI. If he went belly up (and we wouldn't have let that happen), our guarantee limited our liability to $50k. As soon as he could value the place up enough we were removed from our liability.
     
  12. MTR

    MTR Well-Known Member

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    Good advice.
    Never been down this road, good to know this stuff.
     
  13. Beano

    Beano Well-Known Member

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    I was a guy in that situation ...I guarantee the loan of my "mate" which he later defaulted on.
    Still not out of the woods yet ...and the default occurred about 6 years ago!
     
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  14. Beano

    Beano Well-Known Member

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    I think i have made every financial mistake it was possible a normal person to make within several lifetimes . ..sometimes wonder where i would be today if i relied on advice and made no mistakes!
     
    Last edited: 26th Nov, 2016
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  15. JM investor

    JM investor New Member

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    Making mistakes is part of the game!

    What are you doing about the default?
     
  16. Beano

    Beano Well-Known Member

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    I had the four properties transferred into my name ..with a option for him to take them back at cost
    But when the default occurred all the properties were running at a major loss
    In one month i lost $50k
    Anyway sold 2 still hold 2 ...these are now cf+ ...both are on the market!
    When the last 2 are sold and all is done and dusted ..i may breakeven (or Not! )
    But i am wiser!
     
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  17. Beano

    Beano Well-Known Member

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    I am doing a JV now but this time with someone substantially more experienced and financially secure.
    Ten years ago he was making over $13m pa
    Doing JV with in-experianced poor partners . ..is NOT recommended . ..when there are financial problems you are left holding the baby
     
  18. jodes

    jodes Well-Known Member

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    We used my husband's Mum as (security) guarantor for our first PPOR about two years ago. We both have good jobs and borrowed well under what we could have but didn't have the full deposit needed to avoid LMI. 15 months later, we had the property revalued and due to capital gains, were able to have the guarantee removed. We saved ourselves thousands in LMI and feel very fortunate that we were able to use her house as security, but also confident that we weren't taking on a risky position (eg borrowing under our means) that would put her at an unnecessary risk.

    One thing to note as @wylie said, banks calculate the guarantee amount differently, which can impact how much the parent is at risk. From memory, our first bank calculated it as follows:

    loan amount – (0.8 * purchase price))/0.75 (or something like that)

    whereas we soon after refinanced (long story) to another bank who calculated it simply as

    loan amount x 20%

    Overall it made about a $50k difference to the security amount, which would have obviously delayed the release had we stayed with the initial bank.

    My Mum also acted as guarantor to my sister and her husband about two years ago, and a few months ago, they also had their house revalued and the guarantor removed.

    Ultimately, as long as you are sensible and the parents are fully aware of the risks involved, I think it can be a great strategy to get into the property market.
     
  19. Ted Varrick

    Ted Varrick Well-Known Member

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    Geez, Beano. I can't actually click the Like button, but if there were a WTF? button with a x2 option, I would have clicked that instead.

    Your "mate" better make sure you are on his Xmas Card list for the next 200 years...
     
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  20. Dean Collins

    Dean Collins Well-Known Member

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    Sorry Jess,

    Disagree with you there, what happens when the kids stop paying the debt (because they cant), its easy for 20/30 years olds to bounce back from losing a house etc.....but if the banks sells your PPOR out from under you when you are in your 60's+ it can ruin retirement in a way you may not be able to come back from.

    My main issue with this isn't even around losing two PPOR in the family, its more we are over extending in a way that is going to affect peoples abilities to spend on TV's/holidays/eating out etc and that's going to drag down the Australian economy.