Helping children in real estate can take many forms, for example a cash gift, a non-interest bearing loan, an early inheritance, allowing an adult child to live at home rent-free to save up for a deposit, or providing a ‘guarantee’ to minimise deposit requirements (or Lenders Mortgage Insurance).
These strategies can all be valuable but there’s another side to family finance that receives much less attention: Financial abuse.
Financial abuse is any behaviour that controls, exploits or takes advantage of a person’s money or assets without their genuine and informed consent.
In the mortgage context it can look like this:
- Pressure to sign a guarantee, or being asked to sign documents you haven’t been given sufficient time to read or properly understand (most often it’s with elderly parents, or less involved spouse)
- Being excluded from conversations with the lender or being kept away from independent legal advice
- Being told “it’s just a formality”
- Guilt, threats or emotional leverage
- Having your signature or consent obtained when you’re unwell
I’m going to focus this article on security guarantees, not that I’ve ever seen any fall-outs or problems, more because I believe it’s the highest risk area.
Guarantees are a promise that if the borrower defaults, then you as guarantor will honour the loan. Within residential lending the structure is often via a ‘security guarantee’, meaning that if the borrower defaults then the lender can look to the security you have provided in support of the loan, often your home…
Ultimately the borrower’s risk becomes yours.
Names and details in the following example are hypothetical and fictional in nature.
Margaret and Robert, both in their late sixties, own a family home with minimal debt. Robert retired two years ago, and their income is largely drawn from superannuation and a modest share portfolio.
Their younger son, Daniel, was building a property development business and wanted to buy a new site. His own finances couldn’t support the loan he needed, so the lender asked for additional security. Daniel suggested his parents could probably help.
The initial request to his parents started very casually “It’s just to get the loan over the line. It won’t cost anything.”
But over the following weeks the tone shifted. He said the deal would collapse without the parents’ signature, and that the settlement date left no time for proper lawyers and independent advice.
When Margaret expressed nervousness, Daniel told her she was being dramatic and didn’t trust him.
On the day of signing, the documents were presented for the first time and the settlement deadline fast approaching.
The paperwork described a guarantee secured by a mortgage over Margaret and Robert’s home. The guarantee wasn’t limited to a fixed amount.
Margaret and Robert both signed without independent legal advice, and Daniel’s siblings weren’t properly informed of the details either.
Eighteen months later, costs blew out and Daniel’s business defaulted. He could no longer honour the loan, so the lender, entirely within its rights under the documents, turned to Margaret and Robert’s home.
They were suddenly facing the prospect of selling the house they’d planned to retire in, to cover a debt they never took out, for a deal they never fully understood.
Daniel may have honestly believed the development was a good one, and he may have genuinely tried to make it work as best he could.
Financial abuse doesn’t always need a villain. Sometimes it’s even unintentional. But the cause is often one person’s needs overriding another’s ability to say no.
Here’s a simple checklist to help protect guarantors…
- Get independent legal advice. This means your own solicitor, not one arranged by the person asking. A good lawyer will explain precisely what you’re signing and what you stand to lose.
- Check if the guarantee is limited. This can cap your exposure to a specific dollar amount. Ask whether the lender will also limit it to the one loan rather than all future borrowings.
- Consider alternatives to a guarantee. Depending on your circumstances, a documented gift or loan, or other structures may let your family achieve the same goal with less exposure. All structures have trade-offs which is where advice matters.
- Think about fairness across your family. If you’re helping one child, consider how it will interact with your estate planning and any other children.
- Ask what happens if things go wrong. What if the borrower loses their job, separates from a partner, or the property falls in value? Are you comfortable with the answers?
- Ask if or how you can be released from the guarantee in due course.
Where we fit in
As mortgage brokers, we’re required to act in our client’s best interests, and we take this duty seriously.
We can explain how lenders treat guarantors, discuss alternative structures, and make sure family loans are set up properly.
But we’re not a lawyers and we can’t give you the independent legal advice that’s often required here.
What we can do is make sure you have the time and space to get all the advice necessary, and we will always raise concerns if we see something that doesn’t feel right.
If you’re contemplating helping a child purchase property, or you’re already part of a family guarantee and would like to understand the lending structure around it, please feel free to speak with us.
Also the Moneysmart website (federal government website, hosted by ASIC) provides further info as well as options for support – Financial abuse – Moneysmart.gov.au
Thanks as always for reading.
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This article provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. Nothing on the Long Property website constitutes legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances.
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