“Bank of Mum and Dad” financing can risk your credit
“Bank of Mum and Dad” financing for kids can put your credit rating at risk
14 January 2013
A recent survey shows high property prices have sparked one in three Australians to seek financial assistance from their parents for their first home, but an advocate for credit reporting accuracy warns that if assistance extends to a parent equity loan, parents need to know there are significant risks to their credit rating.
ING Direct’s recent global survey, as reported in Australian Broker reveals that the average age of a first home buyer in Australia is now 26 years old, with one in three tapping the “Bank of Mum & Dad” to put their housing finances on a firmer footing. [i]
research found that the younger the age group, the more
likely they are to have received financial help. Over half
of 18-24 year old homeowners received money either towards
their purchase or to help with home loan repayments,
compared to 38% of 35-44 year olds and only 22% of those
aged over 55.
CEO of MyCRA Credit Rating Repair, Graham Doessel says in some cases putting up a deposit is not enough, and the parent is required to go guarantor or put up equity to secure the loan for their child.
But the danger for parents is that their credit rating is then linked with the credit rating of their child through a loan like this, despite parents having little control over the outcome of repayments.
“If for some reason repayments are not met, the parent becomes liable for this debt, and may be defaulted along with the child. Unfortunately they may not be aware the loan is or was in default until such time as they attempt to take out credit for themselves and are refused,” Mr Doessel says.
He says a negative entry on a person’s credit report will mean it is difficult to get credit. He says defaults impact the ability to obtain credit for 5 years, and even too many late payment notations may make things difficult for 2 years.
“In cases of significant arrears, the bank begins to use the property the guarantor put forward as collateral to recover lost debts. The guarantor is in danger of losing their home,” he says.
He suggests parents considering going guarantor on
their child’s loan should sit down and ask some tough
questions before committing.
“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 in doubt, don’t risk your good name to guarantee the loan,” Mr Doessel says.
With ING reporting that three-quarters of Australians still agree it’s better to buy than rent, Mr Doessel says parent equity and guaranteed loans may continue to rise.
He recommends parents take
some things into consideration before signing off on the
1. Seek independant and or legal advice prior to any agreement being made.
2. Insist there is safety net for 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.
MyCRA Credit Repair is Australia’s number one in credit rating repairs. We permanently remove defaults from credit files.