We have an increasing habit in Australia of asking older retired people to guarantee the loans of relatives. The person may not be vulnerable by any ordinary definition, except they are unable to say no to their relative. The loan will inevitably put stress on the older person, and their relationship with the person they are lending to, even if there is no default.
Financial Services Royal Commission
At the moment there is a Financial Services Royal Commission into, amongst other things, the practices of banks and lenders. Unfortunately some people have been receiving information that the Commission can make a decision to refund investors or provide compensation. This isn't what a Commission does. A Commission only investigates and makes recommendations.
Evidence has been given to the Commission this week about extreme practices, like falsifying data or offering more money than the person needs to increase the broker's commission. However there are practices that while less extreme also fail to properly protect the most vulnerable person, like brokers who deal predominantly or exclusively with the 'abuser' which is the person getting the benefit of the loan, rather than dealing with the elderly person who is providing most or all of the security and has the most to lose from the transaction.
A solicitor simply cannot act for the children and the parent in these circumstances, they cannot advise both or even explain basic functions to both because it is recognised that the parties have fundamentally different needs. Why then do we still allow a broker or a bank to sit in the middle of these two people giving them similar or identical advise? If accountants cannot be employed by the same firm as auditors, so that there is no risk of cross over or conflict, then why can banks be operating on both sides? It would seem that the conflict here needs to be dealt with.
What does this mean?
Parties should not enter lightly into these arrangements. Often we see parents co signing loans with their children to buy a house or refinance a house, perhaps a different mortgage product is needed where the contribution of the parent is capped to simply cover the additional equity needed rather than all assets and income of the older person being available to the bank. If the parties had to have different brokers then different products could be proposed, not only products that benefit the child. It is vital that the parents get their own independent legal and financial advice and not simply accept the advice being given by the broker through their children.
Bruce Coode has forty years experience in real estate transactions and loan transactions and can discuss your options with you. He can also direct you towards a different broker who may be able to find a product that will work better for you and your children. Don't simply accept what you are being told about your child's loan product by the person who is trying to close a sale with your child, get your own separate advice.