Helping your kids buy their first home: Beware of the Mortgage Guarantee
It is a well-known fact that it is becoming increasingly difficult for the younger generation to buy their first home. Property prices are just so high. For property owners, this is great news, but the government has made attempts to slow the rate of growth in the property market in an attempt to increase accessibility to the housing market.
Interest rates are relatively low for owner-occupiers, while higher for investors. There are now greater First Home Buyer Grants for the exemption or concession of Stamp Duty, a major expense for all property buyers. And there is the surcharge on stamp duty for foreign investors.
Let’s face it, owning your own home is just part of the Aussie dream. Yet it is still out of reach for many.
What is a Guarantee?
The guarantee is simply an agreement to pay the debts of the person to whom you are standing surety. Seems simple, right? Read on!
Acting as Guarantor – what can really happen
Since the GFC and even more so in recent times, the banks have tightened their lending criterion. Access to finance is more difficult and more onerous. Even though the banks have a mortgage over the property and may require up to a 20% deposit, they often still require further security. And that’s where the seemingly innocuous Mortgage Guarantee comes in.
Parents are being lulled into the false sense of security that if they do provide a guarantee, there will be more than enough equity in the property to cover any default, and that’s probably true.
What people don’t often realise is that the mortgage, and therefore your guarantee, usually include an ‘all monies’ clause. You are therefore guaranteeing to repay any debt owing by that the person, say your child, to the bank, and not just the debt relating to the purchase of the property. And that puts your own property and retirement at risk.
It gets worse – say your child and their partner ask you to be guarantor for the purchase of their first home. Years later they split up, sell the house, divide their assets and life moves on. Your child’s ex gets into financial strife and owns the bank money. He or she can’t pay, and it’s at that point that bank sets their sights on you! Unfortunately, this has already happened to some unsuspecting parents, trying to give their kids a helping hand.
Estate Challenges and Planning
A knock-on effect is that if you stand Guarantor and that guarantee is called upon, you will need to also change your Will and Estate planning mechanisms. A disgruntled family member could argue that any money paid for the guarantee was an advance of an inheritance or a debt owing to your estate from your child. It is best then to be very clear about how this is to be treated, to avoid further complications and challenges to your own Estate.
How to protect yourself
Firstly, you should carefully consider whether to give the guarantee at all. If you do, you will need to obtain independent advice from a lawyer as to the full extent of what your liability may be. It may seem trite to say but listen to your legal advisor and think carefully before signing anything.
Make sure, and get it in writing, that your Guarantee to the bank AND the mortgage that you are guaranteeing, do not include an ‘all monies’ clause that the bank can recover unrelated debts against.
Consider giving your own outright loan to your child, which you can secure with a mortgage over the property, that will help them buy the property without you being involved with the bank. You can recall this loan if they later sell the property, and even earn interest on it.
While the banks may not accept it, you could offer a limited or revocable guarantee, within which you stipulate the exact extent of your liability.
Alternatively, you could gift them the money. But in doing so, ensure that your Estate planning and Will reflects whether this is a gift or an advance on their inheritance.
The aforesaid is not legal advice and is only general in nature. Please obtain advice specific to your own circumstances, alternatively get in touch with the writer.
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