Loan guarantor high-risk role
Going guarantor on a loan is something that would scare the living heck out of me.
The shocking consequences of doing it are written across the bankruptcy listings, mortgagee sale notices and court judgments.
But unfortunately we have collectively so mismanaged Auckland’s housing needs that going guarantor on a home loan seems likely for parents like me who want their kids to own a house in the city.
I, for one, am horrified by house prices, failing to see it as a good thing that a nation’s people and economy is well-served by a stock of homes young people can’t afford.
But we are creatures of our time. We can only deal in the moment. Some generations have had to cope with wars, some with disease, some with repressive gender and racial prejudice.
For those in their 20s and 30s a mismatch between incomes and house prices seems the cross they have to bear.
Crossing your fingers and holding off buying a place in hopes of the Government (voted in largely by home-owning nimbies) will bring in a raft of change that will give young folk a more realistic chance to participate in our homeowning democracy hardly feels like an option. So how do you do it? Given how long it can take to even save a deposit, the answer has been to borrow 90 per cent or more of the asking price from the bank. That’s not going to be so easy in future as the Reserve Bank plans to limit the number of such high loan-to-value ratio loans banks can issue.
Most attractive of the unattractive options open in such a world is to get mum and dad to guarantee your loan. That way the bank gets its security and can thumb its nose at the Reserve Bank.
Of course that brings risks to mum and dad, most notably that if the kids don’t make their mortgage payments, the bank comes knocking.
In a nightmare scenario, a guarantor could end up losing their own home.
In Australia, banks have all pledged not to do unlimited retail guarantees, and good on them. Here, banks continue to use them.
But Westpac may have taken a step that ends that on housing loans. Its new Family Spring- board mortgage wheeze allows parents to guarantee a first mortgage – say $60,000 – with the second mortgage – say $400,000 – entirely the responsibility of their offspring.
Cynics might see this as Westpac using family as a springboard to making even more money and to allow the property market bandwagon to roll on uninterrupted.
But it at least means that should the offspring stuff up and the house sell for a huge loss at mortgagee sale, the guarantor knows they will not be up for more than the $60,000. This is the way that guarantees should work.