Read the small print before signing bank documents to ensure you are not liable for your children's debts when helping them buy a home.
Read the small print before signing bank documents to ensure you are not liable for your children's debts when helping them buy a home.
PROPERTY FINANCE
If you want to give your lawyer and mortgage broker palpitations, tell them you're going to help your children buy their first home.
Up to half of first home buyers are helped by their parents.
And what could be more natural than wanting to give the children a leg-up into their first property?
If you haven't got cash up front you may want to borrow against your home to give your children a deposit. It's a good thing to do -- providing you have your eyes wide open. If not, it could be financial suicide.
The trouble is that parents are putting themselves into huge financial danger.
Some have found that by extending their mortgage to give the kids a deposit they've lost their own home when it all turned awry.
What most parents don't realise is that by raising money against their home to give to the children, they are signing unlimited guarantees unwittingly.
"Unfortunately, banks will often tie in parents as guarantors without explaining the risks or having them seek independent legal advice," says Stuart Wills, mortgage broker at MortgageLink Auckland.
Parents who walk into the bank don't usually read the small print.
They sign documents guaranteeing all of the children's current and future borrowings, including credit cards, car loans, rental properties, business loans and so on. If the children default on any of that debt, the parents are liable to pay for it. If they can't the bank can and will sell their house.
Wills saw a case in which the parents paid the house deposit. A few years later their son and his wife divorced. The bank had let the couple run up $330,000 of mortgage and personal debt on the $300,000 home, knowing that it could sell the retired parents' house to pay off the kids' outstanding debt.
"Parents aren't warned by banks about what their risks are," says Wills.
A good mortgage broker will negotiate with the bank to limit the parents' liability to the amount loaned.
Telling your parents you have dropped them into a financial black hole can be can be distressing for everyone.
Even so, be aware that most standard bank guarantees enable a bank to chase the guarantor for additional sums such as interest, administration costs and legal costs racked up while it pursues the guarantor and the borrower.
If the children default on any of that debt, the parents are liable to pay for it. If they can't the bank can and will sell their house.
Even a limited guarantee isn't foolproof, says Wills.
If both generations are with the same bank and the parents later get new credit cards or loans, they may unwittingly sign new unlimited guarantees, cancelling the old limit.
To avoid this, don't be tempted to take the children to your bank to get their home loan. Make sure they are with another bank. Even better, says Wills, is to arrange through a mortgage broker to raise the amount of money you're lending or giving to the children independently. That way the two aren't linked in any way.
Sometimes the bank asks the parents to be a guarantor anyway, even if there isn't a loan involved. Avoid this at all costs.
Westpac has one mortgage product called Family Springboard, which limits the parental liability. It splits the home loan into two and the parents are linked only with one of the loans. Parents still need to be careful, says Wills, not to sign their limited guarantee away.
Parents may begrudge the cost of going to see a lawyer. But the bank isn't the only risk.
What happens if your child splits from their partner? Who does the money you've lent or given belong to?
Without legal advice the ex-partner might be able to swan off with half your money.
Finally, the moral of this tale is to lend to the children, but only through a mortgage broker with advice from your lawyer.
