Should families help children into a mortgage?

Is this a good idea?

Considering the high cost of housing, parents acting as guarantors could be the only way left for some children to get into property.

However, some experts say that if a child gets into financial difficulty he/she may get yourself into financial difficulty as well and you could risk losing your home.

Most people are aware that family members, usually parents, can act as guarantor on their personal loan. But many aren't aware that family can also act as a home loan guarantor.

'Family equity loans' allow kin such as parents or grandparents to provide a guarantee in support of a borrower's home loan application by using equity in their own property as security.

This approach helps bridge the borrower's upfront expenses and deposit gap, assisting them in gaining loan approval and maximising the amount they can borrow. It also removes the need for lenders mortgage insurance, which can be costly.

From what I'm hearing, there are two subgroups driving this phenomenon:

1. Generation Y and Generation X needing a little financial help to buy a home; and
2. Parents wanting children to finally leave the family nest and invest in their future via property.

You may have a laugh at the second point, but our loan consultants are seeing it happening with more frequency than ever! Not surprising given the much-talked-about propensity for Gen Y to soak up the security and cost-savings of living with parents for longer.

However, these parents may be on to something ...

more here
http://blogs.domain.com.au/2009/04/guest_blogger_should_families_1.html
 
I think, if all the relationships in the family are in good shape, it's fine for families to help children get their homes with bank guarantees - under the following conditions.

1. The child is a good responsible citizen with a track record for good money management, a steady job, and income protection insurance.

2. The child is on good terms with you, and has proven they'll do the right thing by you even when they're on bad terms with you.

3. You trust the child to disclose as soon as they are in trouble and work with you on a solution.

4. The loan structure limits your liability to 20%. (ie - a 20% mortgage over one of your properties and an 80% mortgage over the child's). No cross-collaterisation, no guaranteeing the whole loan.

5. You could afford to take over the loan over your property if necessary.

6. You're sure that your relationship with the child would survive if you had to take over repayments on your property, if they default through no fault of their own (eg - unexpected collapse of their employer or a franchise of which they are a member).

7. The child has cleared most of their consumer debt and reduced their credit card limits to agreed levels.

8. If the child is married, the marriage is stable.

9. If the child is single, the child does not have a history of multiple unwise and expensive relationships.

10. The child shows willingness to buy something modest but comfortable - no McMansions (unless possibly if the price is the same due to a depressed market, or after factoring in reduced maintenance costs, or the figures otherwise add up). In other words - the child is committed to making a sustainable purchase.

It's often said that if an applicant needs a guarantor, they're a bad bet, but I really don't agree with that, if the only barrier is a deposit. In some cases it is very hard to save a deposit while renting. There are a lot of hidden costs in renting, especially if the rental market is unsatisfactory, and especially if we're talking about a blended family starting again after divorce(s). For instance, rentals are rarely well insulated, so electricity bills can be two or three times as high. The rental will often be too small for the family, so there may be storage costs and costs to take the family out just to escape cabin fever. There may be consumer debt to clear first. All the while, prices are rising. But I do think it's a "handle with care."
 
  • Like
Reactions: BV
Hiya

In many cases, the parents can stump up 5 or 10 % through a LOC on their home which they can lend to the kids,

Tends to limit the exposure, and is more risk tolerant than providing the traditional security guarantee.

ta
rolf
 
Is this a good idea?
Considering the high cost of housing, parents acting as guarantors could be the only way left for some children to get into property.

I agree with Rolf.

NEVER, EVER, EVER go guarantor for ANYBODY. Lend them cash by all means, give them cash if you want, but NEVER, EVER, EVER go guarantor for ANYBODY - not even your own Mother.
 
  • Like
Reactions: BV
i'd say offering security etc. etc.=Yes
BUying it for them = No

I think its important to learn the lessons of life for most. its part of growing up.

I bought my first car by myself, saved and worked my butt off for it, it was trash but I cherished it and took good care of it. I knew people whose first car was a brand new WRX at 18yrs old, with $10k in modifications, it was written off within 12 months, and replaced by a BMW.
 
  • Like
Reactions: BV
I wouldn't give anything unless they have made some effort towards saving for a deposit and have shown some responsibility with money. It could be that you match dollar for dollar up to a certain amount through cash or a LOC. I would not go guarantor.

If a child is working (and they have to be to get the loan) you would have to seriously question why they are not able to save before even thinking of giving them anything. You may find in this case you're paying their repayments and/or bills as well.
 
  • Like
Reactions: BV
Lend them the cash
Then secure it with a 2nd mortgage after the bank so they cant go back and do anything without your knowing it.
 
I agree with Rolf.

NEVER, EVER, EVER go guarantor for ANYBODY. Lend them cash by all means, give them cash if you want, but NEVER, EVER, EVER go guarantor for ANYBODY - not even your own Mother.

Lending cash, giving cash etc all has costs incurred by the parents (higher interest rate on LoC's, not as much cash if they give or lend it, admittedly the higher LoC rate can be passed on to the child, but that may not be the best thing either), whereas going guarantor can (and ideally should) have no cost to them, on the other hand it can also be devastating if something goes wrong.

Basically its not a black and white situation, I think its something individual families need to decide for themselves after weighing all the pro's and con's and potential con's ; D

It most definitely isn't for some people (one might argue "most" people) but there are definitely families for whom it is the right or best choice for them.
 
Last edited:
I would consider assisting with cash for a deposit, provided a number of conditions were met, similar to those mentioned by deejay. No way would I be guarantor though - it removes all the relevant risk and responsibility from the recipient IMO and they won't learn anything about responsible risk taking when they know that is sitting behind them all the time.

I would like to see:
- A history of responsible employment / saving / investing / delayed gratification - ie not spending it all on doodads.
- A history of associating with people who are a positive influence on them.
- A willingness to live in a modest place in a low end suburb initially and work their way up the property ladder rather than wanting to go straight to their dream property.
- A willingness to live in a property with high land value (ie an older house without the mod cons) rather than a new apartment etc with an eye to its potential for CGs and renovate etc while living there to add value which would be CGT free for them - ie not just sit back and expect it all to be there for them on day one.
- A history of contributing to the family / household tasks and not just laying around expecting things to be done for them.
- A history of respecting their parents! :p

If and when these things were in place to a reasonable degree then any assistance would be in the form of a gift - no strings attached. From there they would be on their own to make what they will of their lot in life. I see no reason why they should start from rock bottom if they have parents who are relatively well off and they prove themselves to be responsible. By the same token, removing all risk from their life (in the form of a guarantee), will teach them nothing at all. It requires a bit of balance...
 
I don't think this is a yes or no question. There are too many variables to consider depending on the individuals and their relationships, as well as financial capabilities of all parties and responsibility levels.

When it comes to money and family I always work of the idea, I will not give more then I can afford to loose without loosing the relationship. It doesn't matter if we are talking outright gift, or loan - anything given must be done so with my own acceptance if everything goes pearshaped and I never see it again, then can I live with that? If I cann't it doesn't happen.

As a result I have some family members who I would happily part with all of my wealth and prospective wealth for (my parents would fall in this category) and some I would not willingly give $5 to go down the street and buy bread and milk. Interestingly, the people I would take the biggest risks for tend to be the people who would never ask such a thing, whilst the other group asks for things frequently (I am really good at saying 'no' but they usually manage to get things out of other people).

I think going guarentor (sp?) in a mortgage is no different. You should always to a risk assessment and analysis and consider what would happen in the worst case senario.
 
In the current environment FHB's need to show a savings history of 5% of the purchase price, with a few dwindling lenders who will still accept the FHOG or gift instead. It now means that if they dont have a savings history the only option is to either get a guarantor, or a gift of 15% to 20% of the purchase price. Its making it very dificult in my field, working with a volume builder.
 
Basically its not a black and white situation,

Sorry, but I disagree completely. It is black & white.

Lending someone cash (with the possible expectation that if it all goes pear-shaped you will never see the cash again) is one thing. {And if you are going to lend cash you need to have that factored in as a worst-case scenario}

But going guarantor (or being responsible for someone else's debts) is entirely another altogether.

At least with lending or gifting cash you know what the risks are and you have put a cap on them. But not so when you go guarantor.
 
Our Son worked 3 jobs, saved and lived frugally, but rented away from home. Being a type 1 diabetic since 15 and now suffering complications, with many stays in hospital, his savings ie deposit has dwindled. Unfortunately (fortunately?) he was given 120 days notice on his rental so we, as a family had to do something about it. Being unable to satisfy a bank of his repayment ability,[being self employed] we are buying a modest affordable house, in his and our names. After settlement we will mortgage it in three names. This gives him ownership, without fear of repossesion as we will fund if necessary. So i suppose we are guarantors, but with 2/3 of the title in our name, and the other third bequeathed, back to us, our concerns are only for his future health. This process has also resulted in him being unable to get the first home grant.
 
Hi BV,

All I will say is that if you decide to go guarantor on a family equity facility, make sure that the guarantee that you give is limited to the amount provided as a deposit ie) 20% of the purchase price of your child's property. Some of the family equity facilities require a full guarantee and these should be avoided. With a limited guarantee, I hardly see how this is any riskier than lending cash to the child, however it is a very personal decision to make.

Regards,

Cameron Perry
Perry Financial Strategies
 
Last edited by a moderator:
But going guarantor (or being responsible for someone else's debts) is entirely another altogether.

As was just pointed out above, its most definitely is not black and white, not everyone has the same goals/reasons for going guarantor and some people are happy to be responsible for someone's debt (because they trust them not to incur more, or at least not without discussing it with them).

To say that people shouldn't do something because of what could eventuate without knowing peoples reasoning, character and history is being over cautious or just plain narrow mindedness.

And going guarantor without knowing the above, or knowing that they are untrustworthy is just plain foolish and reckless.

Sure there is an element of risk involved in doing so, but there is a risk in just about everything we do.
 
I agree with Rolf.

NEVER, EVER, EVER go guarantor for ANYBODY. Lend them cash by all means, give them cash if you want, but NEVER, EVER, EVER go guarantor for ANYBODY - not even your own Mother.

I've got lots of guarantor horror stories so couldn't agree more.

The reality is that most people of go guarantor see it as a form of paperwork rather than an enduring liability.

If you're not prepared/can afford to give the beneficiary an amount of cash equal to your potential liabiity under the guarantee, don't.
 
If i have to come to this decision , i want to see 1/2 of the savings and i would try to pay the other half, this is evidence of ability to save and spend wisely, and giving them a reason to apreciate their home long term.
 
Back
Top