Parent equity loans skating on thin ice with credit rating

Media Release

Parent equity loans skating on thin ice with credit rating

1 November 2012

Predictions of a rise in parent equity loans following the pulling back of first home buyer’s grants in some states has a leading credit rating repairer worried about the possible impact on parental credit ratings in the crucial pre-retirement years.

CEO of MyCRA Credit Repairs, Graham Doessel says a possible rise in parent equity loans is a dangerous trend. If the loan falls into arrears, parents would be liable, forcing them to work much longer than anticipated to pay off the debts that impact their own credit rating.

“Many people go guarantor for their children, without assessing the risks to their own finances should the repayments not be met. If the child falls into arrears with payments, the parent is liable for any debt, and they are also blacklisted from credit accordingly,” Mr Doessel says.

1300 Home Loans managing director, John Koldenda recently told Australian Broker he predicts a surge in popularity for the parent equity type of loan following the wind up of first home buyer subsidies in each State.

"These loans have many benefits including allowing children to avoid expensive Lenders Mortgage Insurance that is paid by borrowers - often young people - with low equity," he said. [i]

But Mr Doessel says whilst there are advantages for the child, if repayments are not made, the disadvantages stretch to both parties.

“If the adult child fails to make repayments the parent is liable for this debt, if that extends past 60 days, the creditor can place a default on both credit files. In some cases parents are not aware repayments have stopped, and it’s not until they attempt to take out credit themselves and are refused that they realise there is a problem,” Mr Doessel says.

He says a default of this nature on someone’s credit file can severely hinder chances of obtaining credit, and defaults remain on a person’s credit file for 5 years.

“Worst case scenario, is the bank begins to use the property the guarantor put forward as collateral, to recover lost debts. There is a danger the guarantor can lose their home. Those people who were so close to financial freedom are now facing debt, and a shaky retirement,” he says.

The Sydney Morning Herald Personal Loans Smart Guide [ii] provides some important questions for people to consider when making the decision whether or not to go guarantee a home loan:

•How much is being borrowed?

•How responsible is the borrower?

•How stable is their employment?

•Does the borrower have any other means of repaying the loan should he or she fall ill, be injured or become unemployed?

•Can I afford to repay the total sum of the loan?

“By far and away the most important question parents need to be asking is ‘could we make the repayments on this loan should our child be unable to?’ If there is any doubt of this, it may be best not to guarantee the loan,” Mr Doessel says.

If people do decide they want to proceed with a parent equity loan, he recommends taking a few additional things into consideration before signing on the dotted line:

1. Seek third party and or legal advice prior to any agreement being made.

2. Insist there is adequate insurance to cover anything that may go wrong during the term of the loan, such as life insurance and income protection insurance.

3. Set a specific amount that will be guaranteed

4. Ensure there is an ending to the time period of the guarantee

5. Request a copy of all bank statements during the course of the guarantee, so that parents are aware of any late payments. This way, payment problems can be addressed prior to any defaults, and while the parent’s good credit rating is still intact.

[i] http://www.brokernews.com.au/article/parents-to-step-in-as-fhb-boosts-end-129917.aspx
[ii] http://www.smh.com.au/money/tools-and-guides/step-4-going-guarantor-20100529-wmcd.html

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http://www.mycra.com.au/

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