Banks have begun to relax Guaranteed loan criteria in a bid to encourage more first home buyers into the market. The relaxations from some banks will now include those outside the immediate family. The banks seem eager to increase business in what are cautious times for home buyers. But should we all jump in? We look at what you are really risking with your asset and your credit rating by guaranteeing a loan for a family member or friend and perhaps for borrowers, when using a guarantor that is not a family member.
By Graham Doessel, Founder and CEO of MyCRA Credit Rating Repair and www.fixmybadcredit.com.au.
Loan Market Melbourne broker Alexander Heifetz has recently claimed several banks have made available to borrowers ‘Family and Security Guarantee Loans.’ The recently amended policies remove certain restrictions for Guarantors, meaning a Guarantor will no longer have to be a parent, sibling or spouse of the borrower for a Security Guarantee, which was formerly known as a Family Guarantee.
Mr Heifetz explained in a recent press release:
“This change in policy is going to help certain first home buyers with healthy incomes but limited savings enter the property market with help from guarantees who traditionally haven’t been allowed to put their support behind a low-deposit holder’s mortgage,” Mr Heifetz says
“Most Guarantee loans are a single loan secured by both properties: the property purchased by the first home buyer and guarantors’ property. The benefit of this option is that there is no requirement to make a Lenders Mortgage Insurance (LMI) payment and that you don’t have to demonstrate that a deposit you have was genuinely saved,” he says.
Although these types of products are becoming increasingly popular, Mr Heifetz suggested that borrowers and guarantors considered the implications before signing a Security or Family Guarantee
An article published last week in Australian Broker features further comment from Heifetz about the possible impact of guaranteed loans. He told Australian Broker while he appreciates that it’s a difficult time for both lenders and first home buyers, brokers need to make sure they’re helping clients view guarantee loans as a last resort – because it’s brokers in the end who are likely to be blamed when things go wrong.
“It comes back to brokers – banks have a bunch of lawyers who will stand up for them, but brokers are the middle men and they’re the ones who will be crucified.”
He offers solutions such as borrowers purchasing a less expensive property, or for those considering going guarantor to look at the possibility of gifting additional money or taking out a small loan as an alternative.
Figures from Insolvency and Trustee Service Australia (ITSA) show that 441 people (non-businesses) went into bankruptcy as a result of liabilities on loan guarantees in the last financial year, and 12 entered debt agreements for the same reason, according to the ITSA’s 2011-12 Annual Report.
If 453 people became insolvent due to liabilities on loan guarantees last year, how many more were forced to sell both homes but remained solvent? How many were forced to take over repayments on the loan for their child or family member? How many still were encumbered with a negative credit listing and refused credit for 5 years due to their family defaulting on the loan? How many didn’t know the loan was in arrears until their credit rating was impacted?
Whilst there may be ways a borrower and guarantor can more ‘safely’ access a guaranteed loan without necessarily risking the property of the guarantor for the entire term of the loan, caution should still be exercised.
From a credit repairer’s point of view, I would rarely recommend borrowers choose a guaranteed loan if they have other options open to them. There are just too many variables. There is no control over repayments. Now, with late payment notations on credit files, not only must repayments on the loan be made within 60 days to avoid a default listing, it must be made on time or face a late payment notation. Too many of those, and these late payment notations could impact your ability to get credit for two years.
So as Mr Heifetz says, guaranteed loans should be viewed as a last resort – and I believe should not be heralded as a chance to boost first home buyer numbers.
It is true house prices are still too high for many first home buyers – but banks could also relax other lending criteria such as lowering deposit requirements or allowing more gifted deposits for first home buyers – so why don’t they? And if they don’t want to bear that risk, why should we?
Adding to the debate is Malcom Bartley, director of finance brokerage B Debt Free who has questioned why a non-family guarantor would want to make themselves so “financially vulnerable”.
“Anything that is not direct family must be related to a business transaction. That benefit must be identified before the guarantor can be put in a position of risk. No one will take the risk just because they’re a nice guy,” he told Australian Broker on Friday.
He warned such situations could give birth to a third-tier industry where there would be opportunities for a business to provide equity to first home buyers to obtain a government grant while they stamp the difference.
“There’s a huge misunderstanding of the debt administration in this country – and there are groups out there that’re saying ‘if you’re in trouble come to us, we’ll buy your property and we’ll let you buy it back’” Mr Bartley says.
He boldly said lenders need to call non-family guarantors what they really are.
“If you’re going to call a savage canine that rips people to shreds a ‘puppy’, that’s not a lie, but it doesn’t give the true description, does it?”
Whether or not you agree with Mr Bartley’s argument, there is no denying that any borrower who seeks help from a guarantor who is not a trusted friend or family member needs to ask two questions: what does the guarantor stand to gain from this transaction? and what could I lose?
The risks for both guarantors and borrowers needs to be understood and weighed heavily, with the full gamut of legal advice, before any party risks their asset and their credit rating.
Image: Ambro/ www.FreeDigitalPhotos.net.