Guarantor

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GUEST OBSERVER
Parents risk losing everything when helping children to buy a home through products such as guarantor loans.
Reserve Bank of Australia (RBA) Governor Glenn Stevens has said more parents may be forced to financially assist their children into home ownership because of the growing affordability crisis.
Mr Stevens added that in doing so, parents may find they don’t have the wealth in retirement that they had planned.
He also questioned why more wasn’t being done by State and Federal governments to implement proven models of home ownership, such as Government backed home finance models in place in South Australia (HomeStart) and Western Australia (Keystart), or allowing young people to access superannuation for a home deposit. 
Parents are risking their personal financial security by backing their children into home ownership.
If there is a change of circumstances and a child can’t make repayments, it is the parents’ assets that are on the line for the portion they have guaranteed. This could mean the lender will allocate some of the parent’s income to repaying the debt, or in the worst case scenario, the parents could lose the family home.
The credit rating of parents will also be affected which may cause problems if they need to apply for a loan themselves, and worse still, they may not be able to use their own home as security when taking another loan.
We know that most parents will do whatever they can to help their children into home ownership, but too many parents are doing so through guarantor loans and risking their future financial security.
Some mainstream lenders were now recognising the risks of guarantor loans, implementing measures which limit the leverage amount available in the family home so it doesn’t exceed 70 percent of the value of the property, capping the loan amount at 107 percent of the property price (including stamp duty and transaction fees) and reducing the maximum amount of the guarantee to 50 percent or less of the value of the property being provided security for.
I call on Federal or State governments to consider replicating successful government-owned home loan models already in operation in South Australia and Western Australia to ease the burden for young home buyers.
Recent figures released as part of the HILDA survey by the Melbourne Institute showed the two states where government backed home loan programs are in place – South Australia and Western Australia – have the highest owner occupier rates in the nation.
HomeStart Finance had assisted one in eight first home buyers into home ownership in South Australia through innovative home loans such as low deposit loans and shared equity products which enable home buyers to borrow more money. 
The housing affordability crisis shouldn’t be a burden that parents have to shoulder for their children, but instead, Governments should be looking to implement measures that directly address the issues home buyers are facing.
Since HomeStart was established in 1989, it has helped almost 70,000 South Australians into ownership
Many of these households wouldn’t have been in a position to obtain finance from a mainstream home loan provider at the time of buying a home. Whether through a lack of savings to put towards upfront costs such as the deposit, or not being able to borrow a sufficient amount of money, HomeStart has been able to offer solutions to these barriers. 
This ensures there is a healthy home buyer cycle that has a good balance of first home buyers and ‘upgraders’, who transition from their first home to their next home within a few years, clearing a pathway for first home buyers to enter the market. In many Australian markets, this home buyer cycle is broken.
HomeStart fills a space in the market that isn’t being addressed by mainstream lenders, who have in place lending criteria targeted at a very specific segment of the market.
I urge governments to consider other programs that have been successfully implemented overseas to help first home buyers, such as using superannuation to fund a home deposit, based on the successful Canadian Home Buyer’s Plan.
The idea was put forward by HomeStart in its submission to the Senate Inquiry into Affordable Housing in 2014, and later mooted by then Treasurer Joe Hockey.
HomeStart was invited to present to the Senate Committee to expand on its submission and also discuss the potential replication of the HomeStart model in other Australian States and Territories.
The Canadian Home Buyers’ Plan enables first homebuyers to withdraw up to $25,000 from their superannuation for the purpose of using it for a deposit on a house, which then has to be replenished over the next 15 years.
We believe there are some great models in place overseas that appear to be helping other countries overcome some of the issues confronting first home buyers - the Canadian Home Buyers’ Plan is one of them.
It is ironic that a household in difficulty with their mortgage has the option to access superannuation to clear arrears, whereas a first home buyer in an otherwise good financial condition cannot temporarily access their super for a deposit and then replenish those funds over an extended period as occurs in Canada.
John Oliver is chief executive officer of HomeStart Finance and can be contacted <a href="https://www.homestart.com.au/Home" target="_blank">here</a>.
 
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jchancellor-FAypfDUnLy

Parents shouldn't shoulder housing affordability burden

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The dangers of parents going guarantor for children was made obvious at in recent royal commission hearings.
Parents pledging their homes as security for bank loans to their offspring with entrepreneurial aspirations was centre stage.
The commission heard an elderly pensioner, who was legally blind, did not have a clear memory of signing the loan guarantee, and or receiving independent legal advice before a $160,000 Westpac mortgage was taken over her Penrith district home.
It certainly didn't look good, but Westpac did not breach the bank's lending guidelines in accepting the mother's guarantee when her daughter borrowed the money to buy a Poolwerx franchise.
For decades banks have taken the precaution of property as security in case the business fails.
Currently Westpac lends up to $50,000 on an unsecured basis.
For higher amounts, the bank demands security which typically sees the borrower's own family home pledged.
But if they don't have property of their own, parents guarantee the loan using their homes as security.
Around one-third of all small business lending is secured by residential property. 
It is calculated that one in three small businesses fail in their first year of operation, two out of four in the second year, and three out of four by the fifth year.
Little wonder Westpac's credit manual recommends that business bankers use "extreme caution" when it comes to parents guaranteeing the business borrowings of their enterprising children.
In recent times first home buyers have escalated their borrowings from the so-called “Bank of Mum and Dad”, which accounts for more than $20 billion in property loans.
This appears mostly being parents utilising their own cash reserves, plus using longheld equity in their house to help finance their child’s first home.
The trend includes going bank guarantor too.
The Bank of Mum and Dad now ranks as the 10th largest lender in the country, Digital Finance Analytics suggested with the cash injection averaging around $90,000.
Parental guarantees are clearly risky for business lending, but to date we've been fortunate when it comes to first time home purchasing lending.
Sydney's rising property prices and equity, low interest rates and strong employment has meant property foreclosure disasters have been kept at bay.
But they might loom. 
I'd suggest it is ultimately up to children, nor parents, bankers and the royal commission, to determine whether guarantees are unconscionable because they could leave elderly parents homeless. 
It was interesting the Royal Commissioner Kenneth Hayne noted there was likely a time where parental feelings of duty and support and affection and sentiment and the commercial assessment of the transaction could be been seen as matters wholly for the guarantor.
Several years ago Westpac agreed to let the naive aforementioned borrower's mum remain in her home until she dies or decides to sell.
Assumedly Westpac's guarantee was water-tight, but extended given sufficient equity.
This article first appeared in The Daily Telegraph. 
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