Parents helping children into their first home
To guarantee or not to guarantee...
It seems impossible for the current and upcoming generation of young adults to enter the property market with the cost of housing in today’s market and the stringent rules put in place by New Zealand’s banking institutions. The current rules surrounding deposits for any prospective buyer is that (in most cases) you need to have a 20% deposit for the bank to approve your lending. There are however loopholes within this rule and this article will focus on what we are currently experiencing as solicitors in the legal world as a growing trend; parents guaranteeing the borrowings of their children.
Currently, the Banks are allowing parents to enter into guarantees (to ensure the 20% deposit criteria is met) whereby parents are essentially placing their assets ‘in the firing line’ in order to help their children place their feet on the first rung of the property ladder. From the bank’s point of view having security placed over the parents' assets ensures that the bank's criteria of 20% is adhered to by combining the deposit monies the children have scraped together with the equity in parents assets to make up that 20%. For example, a child has a $50,000.00 deposit but needs a $100,000.00 deposit in order to satisfy the bank that they are placing 20% equity into a $500,000.00 property. The parents will need to have assets worth $50,000.00 in order to make up the difference. The problems parents face here is that the bank’s never limit the guarantee to the amount that the parents are providing (unless a solicitor requests a limit which can be approved or denied depending on individual circumstances) and the parents end up guaranteeing their children’s entire loan plus all interest and costs incurred by the bank to recover the debt as well as any future borrowings of the children.
Now we would all like to think our children will not default on their mortgages but on the slight chance that they do, the parents are now faced with being placed into the shoes of the borrower and servicing the loan as if they were the original borrower.
Some matters that need to be considered by parents when entering into guarantees are that a guarantee is likely to affect the parents’ own ability to borrow and the guarantee extends to their personal assets including the possibility of losing their own home in order to satisfy the debt under the guarantee. Another issue surrounding guarantees is that banks do not terminate guarantees when the loan is repaid so parents can still remain liable for any future borrowings of their children without knowing this. The onus is on the guarantor (parent) to notify the bank that they wish to terminate the guarantee and not have it extended to future borrowings.
We would strongly advise all parents thinking of guaranteeing their children’s loans to obtain independent legal advice before entering into what can be seen as a daunting document so that they have a full understanding as to the nature and effect of the guarantee and what they are actually signing up for.