A number of lenders, including the big four banks, have introduced tighter controls for parents guaranteeing their children’s’ home loans, in response to the ABA’s new Banking Code of Practice.
Over the past four years, there has been a 300 per cent rise in loans from parents to their children. Australian parents currently lend over $20 billion to their offspring each year, effectively making the ‘bank of mum and dad’ our ninth largest lender.* This financial assistance includes monetary gifts, loans, help with mortgage repayments and offering to be a loan guarantor. The increase in parental assistance is, in part, fuelled by the long run of property price increases, bank demands for larger deposits and tougher lending requirements.
Parental guarantees can be particularly fraught as they are more complex. Unfortunately, the legal profession has seen an explosion of family disputes and legal battles in recent years, resulting in devastating family rifts.
The recent Royal Commission determined that lenders should be doing more to ensure both borrowers and their parental guarantors fully understand their rights and liabilities. The key concern is that parents risk big financial liabilities in retirement if something goes wrong.
When it comes to being a parental guarantor, common mistakes include not properly documenting the original ‘agreement’; not preparing for changes to circumstances such as changes to income or if the child gets divorced; and not seeking independent legal advice.
The new guidelines for parental guarantors mean that:
– guarantors will face more scrutiny regarding their suitability as a guarantor. They will need to provide more information about how the guarantee will impact their finances.
– guarantors will have to show they obtained legal advice or reviewed the terms and conditions.
– co-borrowers who do not receive a substantial benefit from the loan proceeds will have to show evidence they understand the risks.
While these new rules will go a long way towards protecting parental guarantors, Smartline still recommends they seek independent financial advice.
Please call me for advice if you are considering becoming a parental guarantor, or if you plan to ask your parents for financial assistance with your home loan. I can help to guide you through the new process and assist in finding a lender that will suit your needs.