Parents who piggy back their children into the property market are not only risking their financial health by doing so, but their good credit rating, a national credit repairer warns.
Director of MyCRA Credit Repairs, Graham Doessel says the trend of placing the family home as collateral to assist kids into the property market could easily see people up against credit problems if loan repayments aren’t met.
“There is no doubt it is very difficult for Gen Y to break into the property market, but it is essential that parents understand the risks involved in going guarantor on their child’s home loan. The decision can affect their finances and their ability to obtain credit in the future if things go bad,” Mr Doessel says.
This comes as the Herald Sun revealed on Sunday Gen Y is using any means possible to break into the property market – one method of which is to use their parent’s property as collateral for their purchase in what is known as a ‘Family Equity Loan.’
“Aussie Carnegie mortgage broker Mark Daly said family equity loans, which can allow applicants to borrow the entire value of a home and avoid costly mortgage insurance, were becoming more popular with younger cash-strapped buyers,” the article says.
But Mr Doessel says the risks are often very high on this type of loan. The guarantor is liable for repayments should they not be met, plus all interest, fees and charges, so if the child fails to make repayments, the family home and the parent’s credit file could be put at risk.
“In instances where repayments are not met, the creditor can place a default on both credit files. Often parents are not made aware the repayments are late until they find the default on their credit file. By then it is too late for their credit rating, and they face being blacklisted from obtaining credit in the future,” Mr Doessel says.
He says defaults remain on a person’s credit file for 5 years.
“So for 5 years both parties are unable to obtain further credit and often unable to take out even a mobile phone plan. Parents who may have been close to financial freedom are now facing debt, and a shaky retirement,” he says.
He says the situation is amplified if the guarantor is unable to cover the repayments.
“The bank begins to use the property the guarantor put forward as collateral, to recover lost debts. There is a danger the guarantor can lose their home.”
“By far the most important question parents need to be asking is ‘could we make the repayments on this loan should our child be unable to?’ If there is any doubt of this don’t go guarantor,” Mr Doessel says.
The Sydney Morning Herald’s Personal Loans Smart Guide provides some other points to consider when making the decision whether or not to go guarantor on a home loan:
•How much is being borrowed?
•How responsible is the borrower?
•How stable is their employment?
•Does the borrower have any other means of repaying the loan should he or she fall ill, be injured or become unemployed?
•Can I afford to repay the total sum of the loan?
Mr Doessel recommends parents seek third party and or legal advice before proceeding. He also recommends a few other policies be put in place:
1. Insist children have adequate insurance to cover anything that may go wrong during the term of the loan, such as life insurance and income protection insurance.
3. Set a specific amount that will be guaranteed, and ensure there is an ending to the time period of the guarantee –otherwise the guarantor could be liable for the loan for years to come.
4. Ask that a copy of all bank statements be provided during the course of the guarantee, so that parents are aware of any late payments. This way, payment problems can be addressed while the parent’s good credit rating is still intact.
5. If the need for a guarantor is purely due to black marks on the child’s credit file, they may still be able to access credit on their own terms. If the credit file contains a default listing which has errors, is unjust or simply should not be there, under current legislation they do have the right to have that inconsistency removed. This would result in a clear credit file and negate the need for a guarantor. People can contact www.mycra.com.au for more information.
Lisa Brewster – Media Relations Mob: 0450 554 007 firstname.lastname@example.org
Graham Doessel – Director Office Ph: 07 3124 7133
http://www.mycra.com.au/ 246 Stafford Road, STAFFORD QLD.
MyCRA Credit Repairs is Australia’s leader in credit rating repairs. We permanently remove defaults from credit files.