Family guarentee for ip?
- Thread starter my03
- Start date
The cleaner way to do it is for your parents to do a separate equity release against the property.
However if your parents are unable to service the additional debt then a family guarantee would be the other options. This of course will mean cross securitisation of the properties hence the first option being the preferable scenario (for both parties).
However if your parents are unable to service the additional debt then a family guarantee would be the other options. This of course will mean cross securitisation of the properties hence the first option being the preferable scenario (for both parties).
Hi my03,
Yes it is. I second Shahin's recommendation. If possible, i'd set it up as an equity release for your parents and use the funds as a cash gift to you. This avoids cross x and keeps your parents (and you) loan structuring clean.
However, depending on the relationship with your parents, it does shift more 'risk' of servicing onto your parents. Without a private contract, they're effectively liable to repay the funds they give you.
In reality, most situations I've seen with this is one where the child simply pays the portion of their parents debt they've released without a formal contract.
With a family guarantee loan, you'll be responsible for servicing the entire debt. The guarantor role comes into play if you fail to meet your commitments and default (and thus protecting the bank by giving them access to your parents security).
Cheers,
Redom
Yes it is. I second Shahin's recommendation. If possible, i'd set it up as an equity release for your parents and use the funds as a cash gift to you. This avoids cross x and keeps your parents (and you) loan structuring clean.
However, depending on the relationship with your parents, it does shift more 'risk' of servicing onto your parents. Without a private contract, they're effectively liable to repay the funds they give you.
In reality, most situations I've seen with this is one where the child simply pays the portion of their parents debt they've released without a formal contract.
With a family guarantee loan, you'll be responsible for servicing the entire debt. The guarantor role comes into play if you fail to meet your commitments and default (and thus protecting the bank by giving them access to your parents security).
Cheers,
Redom
Haha DT, solid.
Yes, a portion of debt would incur interest from your parents loan.
You can either:
a) pay this portion - have a legal contract with parents, or just agree to.
b) parents pay this portion - they will be liable to it without a legal contract.
Its better for loan structuring, but some parents may not like it as much as the guarantee option.
Redom
Yes, a portion of debt would incur interest from your parents loan.
You can either:
a) pay this portion - have a legal contract with parents, or just agree to.
b) parents pay this portion - they will be liable to it without a legal contract.
Its better for loan structuring, but some parents may not like it as much as the guarantee option.
Redom
Thanks guys, sorry to annoy you but what benifits would this option have for loan structuring? I assume the benifits are substantial if it is still preferred even if you're paying interest as opposed to not paying interest at all
Can we select to pay the interest of the borrowed equity first to get it out of the way first?
Thanks greatly appreciated
Can we select to pay the interest of the borrowed equity first to get it out of the way first?
Thanks greatly appreciated
Assuming you get the same 'rate' as your parents, you'll be paying the total same amount of interest.
Option A - Equity Release:
Parents withdraw enough equity for your 20% deposit, say $100k. This will incur interest repayments (about 5k per year). Your parents are liable to pay this 5k p.a unless you have a contract with them or you agree to pay it yourself.
Remaining 80%, say $400k, this will incur interest and you are liable to pay it.
Benefits: Clean, avoids cross X between you and your parents security.
Cons: Takes a little longer (two separate loans), relies on your parents ability to withdraw equity, parents may take on some risk if you run away with the 100k and don't have a contract.
Option B: Family Guarantee loan
You borrow 100% (or 105%) of the property value, say $500k. Your parents agree to guarantor the loan.
You are liable to service the entire loan legally. If you default, your parents security may be used to protect the bank from losses.
Benefits: quicker, avoids contract with parents
Cons: Cross securitises you and your parents asset. Not ideal.
No need to apologise, its what SS is here for.
Cheers,
Redom
Option A - Equity Release:
Parents withdraw enough equity for your 20% deposit, say $100k. This will incur interest repayments (about 5k per year). Your parents are liable to pay this 5k p.a unless you have a contract with them or you agree to pay it yourself.
Remaining 80%, say $400k, this will incur interest and you are liable to pay it.
Benefits: Clean, avoids cross X between you and your parents security.
Cons: Takes a little longer (two separate loans), relies on your parents ability to withdraw equity, parents may take on some risk if you run away with the 100k and don't have a contract.
Option B: Family Guarantee loan
You borrow 100% (or 105%) of the property value, say $500k. Your parents agree to guarantor the loan.
You are liable to service the entire loan legally. If you default, your parents security may be used to protect the bank from losses.
Benefits: quicker, avoids contract with parents
Cons: Cross securitises you and your parents asset. Not ideal.
No need to apologise, its what SS is here for.
Cheers,
Redom
The benefit in borrowing from your parents is that this is less risky for them. They are not putting up their property as security for their loan, but just lending you some money. They could even take a 2nd mortgage over your property for added security.
It is also easier to unravel - you just pay them back and then you each go your separate ways so to speak. If you use their property as security you would need to approach the lender to release this at some future date.
It is also easier to unravel - you just pay them back and then you each go your separate ways so to speak. If you use their property as security you would need to approach the lender to release this at some future date.
Equity guarantee or parents giving you money, both have pros and cons.
The benefit of parents giving the money is they retain control over their property. If the child doesn't make the payments, they can still make payments on the money they've borrowed and not be affected by the childs conduct.
This is also its weakness. The child isn't directly responsible for money the parent has borrowed and in some cases might prioritize their own loan over paying back the parent, or the parent might simply forgive the debt of the child.
Using a family guarantee means that the child has primary responsibility for the full debt. They're not borrowing money from the parents, they're still borrowing it from the bank. All or nothing.
Of course the parent is giving the child some control here. Their security property is at risk if the child stops making payments. In most cases their exposure is limited and it can easily be structured that way, but there is still some risk and consequences to the parent.
The process for discharging one scenario or the other is the same, it's even the same form. I don't see that this is a big deal either way. Estate planning does have consequences as well, I don't know if there's a simple solution to this, but I suspect it's probably easier to assign money with a family guarantee.
The best solution often depends on the family relationship. What the parents are re willing to risk and the way in which they manage that risk can suggest the most appropriate approach. The best thing to do is the make sure that everyone understands the different approaches and makes an informed decision without pressure from each other.
The benefit of parents giving the money is they retain control over their property. If the child doesn't make the payments, they can still make payments on the money they've borrowed and not be affected by the childs conduct.
This is also its weakness. The child isn't directly responsible for money the parent has borrowed and in some cases might prioritize their own loan over paying back the parent, or the parent might simply forgive the debt of the child.
Using a family guarantee means that the child has primary responsibility for the full debt. They're not borrowing money from the parents, they're still borrowing it from the bank. All or nothing.
Of course the parent is giving the child some control here. Their security property is at risk if the child stops making payments. In most cases their exposure is limited and it can easily be structured that way, but there is still some risk and consequences to the parent.
The process for discharging one scenario or the other is the same, it's even the same form. I don't see that this is a big deal either way. Estate planning does have consequences as well, I don't know if there's a simple solution to this, but I suspect it's probably easier to assign money with a family guarantee.
The best solution often depends on the family relationship. What the parents are re willing to risk and the way in which they manage that risk can suggest the most appropriate approach. The best thing to do is the make sure that everyone understands the different approaches and makes an informed decision without pressure from each other.
thanks for all the great informative replies guys greatly appreciated.
So If I borrow equity from my parents, how is the loan structured in respect to which portion gets paid when I service the debt? i.e- when debt servicing, how does the money get allocated to my parent's loan and to my own mortgage?
Thanks guys
So If I borrow equity from my parents, how is the loan structured in respect to which portion gets paid when I service the debt? i.e- when debt servicing, how does the money get allocated to my parent's loan and to my own mortgage?
Thanks guys
The loan with the parents is a private matter between you and then, bank will not be involved. You should have a written loan agreement with them and you should follow the terms, whatever they are agreed upon. ie pay them monthly if you have contracted you will.
