With many people worried about housing affordability and getting their children into the property market we are seeing an increase in parents guaranteeing their child's loan. While we understand the desire to help out your children, many parents don't seem to fully consider the risks that are also involved.
For instance, what is the limit of your liability? Are you guaranteeing a specific amount, whatever is required to get them below the 80% threshold, or are you guaranteeing the whole loan?
Family Law considerations
If your child is married or in a de facto relationship, or they become married or enter into a de facto relationship after you make the guarantee, then you could find yourself a party to their family law dispute or worse still, a party in the family law litigation. This is the case even if the spouse's name is not on the property.
This is further complicated by the fact that many banks require the parents to sign statutory declarations about the nature of the gift or guarantee, stating that it is a gift and they do not expect to be repaid. Obviously it is difficult to tell the Family Court that you always intended that your child would repay you, or you only ever meant for your child to have it not both parties to the couple, if the bank has made you sign a statutory declaration or bank documents that say the opposite.
If you die before the loan has been repaid, which on a 30 year mortgage may well happen, then this could cause problems for your Estate. You will have a mortgage registered against your property and your Estate will not be able to sell the property until that mortgage is discharged. The bank will either require your children to refinance, or if that is not possible then your Estate might have to pay out the child's entire mortgage prior to any money going to the other children.
While this may seem unlikely, imagine the situation if you were to die and then your child was to subsequently loose their job. They will not be able to refinance without employment, and the bank will look to your property for satisfaction of the debt.
Fixed interest and the housing bubble
If your child has chosen a fixed interest loan then the fines if they have to sell can be substantial, say $25,000 to $30,000 on top of the mortgage and the usual bank fees. This may eat up so much of the equity in the property that in order to cover the bank's costs, the selling agent's costs and the other costs the bank will turn to your property.
Additionally, if the alleged housing bubble does indeed burst then many parents who thought their child had plenty of equity in their property may find that this is no longer the case. If the bank feels that the property is no longer sufficient security to cover the debt then they can move to force the sale even if the mortgage repayments are being met, we have seen it happen before with clients. The bank is not required to sell your child's property first and then come to you, they can move against whichever party they choose.
There are from time to time products available on the market that can severely restrict your liability, so that you are giving a guarantee for instance but only to a certain cap. However if the bank that your child is getting their mortgage with doesn't offer that product, they will seek to actively dissuade your child from seeking out this product. While we have no legal answer for this tension between what your child wants and what is in your best interests, it is helpful if you actually know what products are available so that you can weigh up your options.
You have no right to be warned if the mortgagors (your child/ren) have fallen behind in their payments. The first you may know of it is when the bank calls you to indicate that they want to sell your property to satisfy arrears.
If there is more than one guarantor then the bank can pursue whichever guarantor they choose, and the bank does not have to pursue your child/ren before they pursue you for the money.
All of this does not mean that you cannot help out your child with their purchase, it does mean that you need proper legal advise, and it may mean that you end up insisting upon a different product than what your child is proposing.
What should I do?
Make an appointment to see Bruce Coode and obtain advice before you agree to any guarantee or documents. You will need to drop the documents off before you come and see Bruce so that he has time to read them and properly advise you.
Bruce has been practising law in Penrith for forty years, and he is experienced in contract law and negotiations generally, and the particular problems of real estate law and mortgage law specifically. He understands more than your basic conveyance and understands that for many people the purchase of a property is one of the most important financial decisions they will make and you want to help your children. He will explain things to you in plain English and help you to navigate the stressful situation that is buying a house.