Brokers have been reminded of the risks that first home buyers face if they participate in the rising trend of using family members as guarantors.
According to statistics recently released by NAB, the incidence of first home buyers who have the backing of parents or a family member as a guarantor has increased from 4.8 per cent to 6.7 per cent between 2010 and 2015.
N1 Finance managing director Ren Wong said that difficulty saving for a deposit and avoiding LMI are two of the major factors behind this trend.
“We do notice first home buyers increasingly get support from their parents via gift money for deposits, not so much as a guarantor for their home loans though, as lenders’ policies are usually around security guarantee instead of income guarantee,” Mr Wong said.
However, Hewison Private Wealth managing director Andrew Hewison warned that if the borrower is unable to continue making their loan payments, the guarantor is under a legal obligation to keep making those payments until the loan is repaid.
“Of course there is the option to sell the property,” he said. “However, if value has decreased, they may have to repay the bank any shortfall by increasing their own mortgage, using their personal retirement savings or by selling personal assets.”
Mr Hewison said a guarantor that is not a high-net-worth individual would be less suitable, as they would not have the level of wealth, assets or flexibility needed in the event of a borrower not being able to make loan repayments.
“In the event that the guarantor is retired and reliant on their superannuation to fund income needs, additional loan repayments as guarantor may place a strain on their own cash flow,” he said.
“As a financial adviser, I would advise anyone looking to go guarantor to a first home buyer to first seek legal advice from a solicitor. An appropriately structured loan agreement may provide asset protection for the guarantor in the event the borrower defaults.”
Mr Hewison said an alternative to family members acting as guarantors is providing an advanced inheritance to the borrower.
If in a position to do so, high-net-worth individuals over 60 could make a tax-free withdrawal from their superannuation as an advance inheritance, he said.
“Bringing forward an inheritance may not only save the interest on the home loan or go towards the deposit, but may also save the child a significant amount of tax,” Mr Hewison said.
He added that although mortgage brokers are not in a position to give financial advice, they need to highlight to borrowers the risks associated with guarantors.
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