A recent AAP report quotes consumer advocate CHOICE as saying “family guarantees could see the borrower and the relative lose their homes”. If this quote is correct then we believe it is quite misleading and in many ways hypocritical as it was not too long ago that CHOICE had an uncomfortably cosy relationship with a mortgage broker itself.
We have a very highly regulated mortgage market in Australia where every mortgage broker and lender must comply with the National Consumer Protection Act and must be licenced or registered with ASIC under the Australian Credit Licence regime. These two instruments place an enormous, some may argue over-arduous emphasis on ensuring that any borrower can afford to repay their loan. The penalties for failure are very significant and include penal provisions.
With home prices in most capital and larger regional cities continuing to grow at well above inflation the cost of entry for most first home buyers is a major barrier. This has been compounded by the removal or restriction of concessions on State imposed stamp duty and the reduction of availability of lenders mortgage insurance above 95%.
For many first home buyers there is little possibility of raising the required 5 percent deposit plus a further 4 percent stamp duty and possibly 2 to 3 percent LMI. As a result for these borrowers the family guarantee may offer the only stepping stone onto the property market.
We agree that family guarantees should not be taken or treated lightly and that the guarantor must be fully aware and capable of making an informed decision. Not all lenders offer good guarantor outcomes however there are some very good options where the guarantee is limited only to the amount required to cover the deposit gap.
In a recent blog article our head broker, Andrew Hunter describes his experience when arranging a guaranteed home loan for his own son see http://keychange.com.au/will-you-guarantee-my-home-loan/. In this article he points out that parents have been guaranteeing car loans, personal loans and home loans for decades. The difference now is that consumer protection legislation is more than ever in favour of the borrowers. As a result lenders impose significant padding in both income and equity calculations when considering a guaranteed home loan.
Of course circumstances can change but this is true for every mortgage and as a result there is a risk, however the risks can be mitigated and managed. The secret is ‘get good home loan advice‘ and don’t take populist one line throw away comments too seriously.