24 April 2014
First home buyers desperate to get a foothold in the property market are receiving financial help from Mum and Dad or other family members at increasing rates through family guaranteed loans, but a consumer advocate warns there is no financial benefit for the guarantor, and significant credit rating risks.
Graham Doessel, Non Legal Director of MyCRA Lawyers, a firm focused on credit disputes, says the difficulties people face entering the property market has sparked an increase in guaranteed loans, where the equity of a property owned by parents or other family is used as collateral.
But Mr Doessel says many people may not be aware of the significant risks involved in this type of loan, which is being offered in some form by most lenders.
“Most people don’t know that family guaranteed loans can be dangerous for your credit rating, because your credit history is then linked with the credit rating of your child or other family member, despite having no claim to the property, and little control over the outcome of repayments,” he warns.
Mr Doessel says in most arrangements, if for some reason repayments are not met, both sides are liable for the debt, and both may be defaulted.
“Unfortunately the guaranteeing party may not be aware the loan is or was in default until such time as they attempt to take out credit for themselves and are refused,” Mr Doessel says.
He adds that new repayment history information being recorded on consumer credit files means loan repayments must be made on time or possibly face a ‘late payment’ notation against your name.
“These late payment notations could impact your ability to get credit for two years,” he says.
Otto Dargan, director of Home Loan Experts recently explained the rise in guaranteed loans to Mortgage Professional Australia (MPA):
“Guarantor loans are now the only product that allows a first homebuyer with no deposit to buy a home and as a result, their popularity has increased,” he told MPA.(1)
A survey conducted last year from ING Direct revealed that 32% of first home buyers in Australia receive financial assistance from family to put their housing finances on a firmer footing.(2)
“The challenge of getting on the housing ladder has inspired a growing trend for first home buyers to obtain financial assistance in order to get the keys to their first property,” ING stated.
Mr Doessel says a negative entry on a person’s credit report will mean it is difficult to get credit. He says defaults impact the ability to obtain credit for 5 years. In severe cases of delinquency, the guarantor’s own home is called upon.
“In cases of significant arrears, the bank begins to use the guarantor’s property to recover lost debts,” he says.
He suggests parents or family guaranteeing a loan should sit down and ask some tough questions before committing.
“The most important question anyone contemplating guaranteeing a loan should be asking is ‘could we make the repayments should our child or family member be unable to?’ If in doubt, don’t risk it,” Mr Doessel says.
He says it is vital to make these considerations:
1. Seek outside independant and or legal advice prior to any agreement being made.
2. Insist there is adequate protection to cover anything that may go wrong during the term of the loan, such as life or income protection.
3. Set a specific amount that will be guaranteed.
4. Ensure there is an ending to the time period of the guarantee.
5. Request a duplicate copy of all bank statements sent during the course of the guarantee. This way, payment problems can be addressed prior to any defaults, while your good credit rating is still intact.
“Get in and do your research about alternatives to a guaranteed loan before you agree. As a parent or family member you may find you can help your first home buyer in other ways without risking your good credit rating to do it,” Mr Doessel says.
Graham Doessel – Non-Legal Director Ph 07 3124 7133
Lisa Brewster – Media Relations firstname.lastname@example.org
MyCRA Lawyers 246 Stafford Road, STAFFORD QLD. Office Ph: 07 3124 7133
About MyCRA Lawyers: MyCRA Lawyers is an Incorporated Legal Practice focused on credit file consultancy and credit disputes. MyCRA Lawyers means business when it comes to helping those disadvantaged by credit rating mistakes.
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