Tough love
Denise Cullen, Sydney Morning Herald, 01st of June 2005
Asking parents to guarantee a home loan is an increasingly popular way for first-time buyers to jump aboard the mortgage train - but consumer advocates warn there are danger signs ahead.
The promotion of "family equity" products can be seen as the solution to high housing prices but they can also derail one's finances and relationships, warns Karen Cox, co-ordinator for the Consumer Credit Legal Centre (NSW).
Lenders report an increase in the number of loans underwritten by parents and other family members by means of a limited or total guarantee. Typically, they allow customers to qualify for a loan or borrow more than they would have otherwise been able to without family help.
James Symond, general manager of distribution with the mortgage broker Aussie, says the number of people helping out family members is up by 20 per cent on this time last year and the trend is particularly apparent in NSW.
Carolyn Bond, manager of the Consumer Credit Legal Service (Victoria), says she is concerned about the increasing use of guarantees, given they are sought only when lenders think borrowers might have trouble repaying a home loan.
She says it is clear why brokers operating on a "no loan equals no commission" basis would prefer to sign an underwritten loan rather than turn prospective borrowers away. But she says there are few benefits for guarantors.
"There is no benefit provided to the guarantor beyond the thought that: 'This allows my son or daughter to purchase their own home'," she says.
"Keep in mind that the only reason [lenders] want security over the parents' property is because they're not prepared to take the risk themselves."
The Commonwealth Bank of Australia, which provides five family equity financing options, says demand for the products has been "relatively steady since [their] launch" last year.
The Commonwealth's security support financing option, where a family member guarantees the total amount of the loan using his or her own house as security, is the most popular, says Jerome Bleijie, the bank's general manager, mortgage wealth, retail banking services.
But Bond questions the way in which family equity products are promoted, as they target young people with the message that they can get a loan so long as parents stump up.
"That can lead to a lot of pressure and terrible effects within the family," she says.
Bleijie says the Commonwealth's marketing "does not specifically target younger customers", and its press advertisements recommend people obtain legal advice and discuss their options with family members.
He says the bank's range of products was released in response to high median house prices, rising interest rates and the increasing cost of living: "Given current volumes compared to overall home loan volumes, we don't see evidence of the product being oversold. [It enables] some customers to enter the property market but it isn't appropriate for everyone."
Research by the Commonwealth revealed that "not being able to afford the deposit" was the main reason given by 60 per cent of first-home buyers when asked why they had not purchased a home already.
It also showed that 68 per cent of parents were worried about whether their children would be able to afford a home one day and that 87 per cent of parents would like to help their children purchase a home.
The desire for parents to give their children a leg-up is understandable but there are other ways to do it, Bond says.
These include giving them a lump sum for a deposit, tolerating them living at home rent-free for longer or encouraging them to purchase a dwelling more suited to their means.
However, giving adult children a deposit could be risky, says Laura Menschik, managing director of WLM Financial Services (formerly Millennium Financial Services). She recommends her clients not to give their children the money but rather "lend it under formal agreement".
Parents usually charge no interest or nominal interest and the amount can be recalled at any time. The arrangement provides some security that the money will remain under the parents' (or the child's) control and will not be divided in the event, for example, of the child's de facto relationship ending.
It will cost several hours of a solicitor's time to draw up a formal agreement, but it is worth it for peace of mind and the preservation of family relationships, Menschik says.
Mother and sun - an unhappy ending
Consumer groups warn that problems relating to bank guarantees can take years to emerge.
One such case is an 11-year-old wrangle that is still unfolding, says Lesley McKenzie, principal solicitor with the Victoria Consumer Credit Legal Service.
In 1994, Doris* was approached by her son, Stephen*, and her daughter-in-law, Carol*, to act as guarantor for a house they wanted to buy.
Stephen and Carol had been told by a bank that their loan had been approved but only on the basis that they could provide a satisfactory guarantor. Stephen and Carol were employed and wanted to borrow enough money to pay off some debts as well as purchase a $170,000 house, a total of $221,000.
Doris owned her own home but she was dependent on a disability pension as income.
The situation began to unravel when Stephen and Carol's marriage broke up and Carol left the family home.
Following Carol's departure, the house was sold, however, the amount it sold for was not enough to pay out the loan in full and Stephen continued to make payments on the outstanding amount.
But several years later he took a redundancy package and started his own business.
The business failed and two years ago, when he was unable to make payments on the outstanding loan, the bank acted to seize Doris's house.
Stephen managed to obtain a lump sum from his superannuation and partially pay out the loan but it held the bank at bay only for another year and Doris was recently issued with another writ of possession.
* Names have been changed.
Industry super funds top performance table
Industry funds dominated the SuperRatings performance tables for balanced investment option for the 10 months to April, with returns of 8.8 to 10.2 per cent after fees and taxes (see table).
The majority of Australians, about 80 per cent, are invested in their super provider's default fund, which in most cases is the balanced option.
Balanced funds have between 60 and 76 per cent exposure to growth-style assets.
The median return was 7.9 per cent, while the bottom quartile was 7.1 per cent.
However, balanced funds did not perform as well as Australian shares funds, which gave a median return of 15.6 per cent, or property, which showed a median return of 10.7 per cent.
The balanced option fared better than cash, however, with a median return of 3.8 per cent and a good deal better than international share funds, which fell by 2.2 per cent.
Over five years, the international shares option looked even worse: down 7.5 per cent a year. Property did best overall: up 11.9 per cent a year. Australian shares performed second best with median returns of 9 per cent a year.
Jeff Bresnahan, managing director of SuperRatings, says the results show choice of a particular investment option is crucial.
Top ten balanced options
- Fund and option 10 mths to description Apr-30
- Qsuper Balanced (75/25) 10.2%
- REST Diversified (75/25) 10.0%
- Unisuper Balanced (70/30) 9.5%
- MTAA Balanced (65/35) 9.4%
- ARF Balanced (75/25) 9.3%
- Health Super Medium Term (70/30) 9.3%
- ESI Super Balanced (70/30) 9.0%
- Intrust Super Balanced (75/25) 9.0%
- First State Super Diversified (70/30) 8.9%
- REST Core Strategy (65/35) 8.8%
- Top quartile 8.5%
- SuperRating's median index 7.9%
- Bottom quartile 7.1%
BETWEEN 60%-76% OF ASSETS IN GROWTH STYLE INVESTMENTS. RESULTS ARE NET OF FEES AND TAX. SOURCE: SUPERRATINGS
