Mortgage from hell

Yep.

And in this environment, they are going to do a full check on everything before any change can be made. This may be one of those times when you may see a private lender, but seems like it is snooker at this point....

Any dirty tricks will see everyone in court.

Can you hold the property ? Can you maybe live in it ?

 

Often parents provide a guarantee to secure to 20% the 80/20 LVR. Once there is 20% equity in the property the parents can pull the guarantee.

No idea if that is the case in this matter, but worth investigating.

I think we are on the same page, I reckon I had a bad first attempt at explaining the idea

 

But there is negative equity.

Also, banks not stupid, they probably already have a long list of the places in trouble, they ain't gonna just let everyone walk away while they hold the grenade, that has no pin, and time is passing

 

Not just negative equity, but negative $700,000 equity it seems.

 

The parents can remove their property by getting an increase in their own property to pay out the $300k limited guarantee. If they pay up $300k then the bank has no choice but to release the guarantee, assuming it is a limited guarantee that is.

 

I am not sure if they could do this. This would be a substitution of security so the lender may want to revalue the remaining security to make sure it is enough to support the loan - the LVR would be over 100%.

 

How ?

Which lender will do this if main security is so negative ?

I suppose it will depend on exactly how it was setup, but they have done this stuff many times and likely have all bases covered. Loan docs need to be fully understood to know what can/cannot be done.

 

What I mean is the parents get an increase in their own loan for $300k. If they can service it. They would use those funds to pay down the Nathan's loans as part of a partial discharge to release their property from his loan. Since the guarantee is limited to $300k the bank cannot ask for more. I work for a major bank and have assessed many cases like this before. This will only work if the guarantee is limited though.

 

Yes that is how I understood it. So you wouldn't need a new valuation?

 

That's the problem - he doesn't have $300k equity. The price would have to have gone up for this to happen, or they would have had to pay down the loan by $300k AND the property value remain the same.

 

A new valuation is usually not required. But even if required it's just for the bank to determine it's position it won't affect whether the request will be approved or not.

 

It is certainly worth the Op doing this if his lender will allow it.

This way the parents have capped their loss at $300,000. They could make a loan to the son so he could still claim the interest and he might have a larger capital loss to write off.

 

BTW another thread with someone else in a similar situation:
Update on our Gladstone situation

 

Not really a good idea. Even if it can be done, the parents are then the primary borrowers for that $300k and it lets the kids off the hook for that $300k. It's not ideal for the parents to be providing an guarantee for that $300k, but it's far worse for them if they're the borrowers.

 

There is no other alternative though. They will still have to face it when the bank comes knocking...

 

That's true, but the bank will put borrowers into default before they approach guarantors.

Lenders are also often more forgiving of elderly parents in this situation. If things got really bad, they might forgive the guarantee and bankrupt the borrowers.

If the parents become replace the children as borrowers, the children are effectively forgiven for the $300k and it becomes the complete responsibility of the parents. Lenders are also less likely to go easy on the parents under these circumstances.

It's all fairly hypothetical anyway. A lender doing their due diligence would see the guarantee and investigate the situation further. It's very unlikely the parents will be able to borrow money until the guarantee is removed. The existing lender isn't going to want to make the parents circumstances worse and external lenders aren't going to want to have anything to do with the entire situation.

 

The removal of the guarantee would be a condition of the loan though. I don't see a problem with this as long as the parents can service the extra $300k debt. I have seen it done before but the guarantee amount was $150k. Not sure under what circumstances banks would 'forgive' a loan, I've never seen it before.

 

it depends. if the parents had equity in their home they may not be able to use it while it is cross collateralised and securing the kids loan.

 

I have seen lenders forgive the guarantors in a parental guarantee situation. A retiree crying on Today Tonight has the ability to generate a lot of bad media for the banks. The can forgive the guarantee yet continue to peruse the borrowers.

Under these circumstances and in the current lending environment, allowing the parents to borrow $300k to replace their guarantee on a deal gone bad starts to look like predatory lending.

Recently we had a loan declined, it was to release equity from an unencumbered property that the daughter and father owned jointly. The money was then going to be used for the daughter to invest. Great serviceability and a really low LVR against the jointly owned property.

Every lender we spoke to refused the loan. They all stated that there was no benefit to the father, they didn't want to put the father's home further at risk just so the daughter could buy more investments. Right now lenders are very hesitant to take on anything that looks even remotely risky.

 

The parents would want to lend to the child in order to remove the guarantee. That way the kid is still on the hook and can claim the interest and the capital loss.