Beware of hidden debt when guaranteeing a family loan.
First-home buyers are increasingly turning to parents to get into Auckland's rampant property market.
Home prices are soaring by up to $1,000 a day in some suburbs and Barfoot & Thompson sales data this month showed the average Auckland house price had risen to $804,282.
The rapid price shifts plus loan-to-value-restrictions are forcing some would-be first-home buyers to delay buying in the region, or to invest in other towns and cities.
But some Aucklanders were managing it with family help. The city's largest mortgage broking firm, Squirrel, revealed almost half its first-home clients were being helped by those closest to them.
Of those, 35 per cent would get a loan or a contribution towards a deposit from their parents and 15 per cent had signed up their folks as a guarantor over a home loan.
In a guarantor arrangement, one person guarantees a loan will be repaid, usually putting up their own property as security.
If the borrower defaults, the guarantor is asked to make the payments. If they do not, both properties can be sold to repay the guaranteed loan.
Squirrel managing director John Bolton said most guarantees his company set up were to lift up borrowers to more than 20 per cent equity.
"In Auckland, people have experienced such large capital growth in their properties there is generally plenty of equity there to allow them to do a limited guarantee," he said.
Banks contacted by the Herald on Sunday said the number of their guaranteed loans was commercially sensitive. Industry sources, however, said the number was ever-growing.
But as family financial agreements rise, the Banking Ombudsman has warned guarantors that generous gestures to their children could cost them more than they imagined. "People who agree to act as a guarantor could find their own homes at risk if the bank calls on the guarantee," Deborah Battell said.
Most guarantees are unlimited and mean the guarantor is liable for "all obligations" of the borrower.
That could include credit card debt and personal loans. If the borrower stops making loan repayments, the bank could pursue the guarantor. If they have accounts with the bank, the bank could take money directly from them.
Battell said if house prices drop, as they did after the 2007/2008 price peak, borrowers could be left with negative equity. If home owners were forced to sell the property because of job loss or relationship breakdown, the bank could ask the guarantor to cover the resultant debt.
Given the risks, guarantors should only agree to a limited guarantee, where they are liable only for a specific part of the borrowing.
Guarantor deals gone wrong have been the subject of four complaints to Battell's office this year. In the 2013/14 financial year, the Banking Ombudsman handled 12 guarantor complaints.
Battell said: "When the guarantee is called up for one reason or another people say, 'I had no idea my son [or] daughter [was] in so much debt'."
One case this year involved a woman acting as a guarantor for her sister's rental property purchase.
But her sister had also bought another property she did not know about, and the woman was a guarantor for that loan as well.
She complained but the bank would not release her from her obligations.
Battell's office did not uphold the complaint because the woman had signed an "all obligations" guarantee.
Bolton encouraged all potential guarantors to seek legal advice before signing.
Dad makes couple's first home possible
Victoria McHardy has her father to thank for help securing her family home. Victoria and her husband, Cory, took ownership of their Papakura home in late 2013, shortly before she gave birth to their daughter, Emily.
But joining the property ladder was possible only because her father, Mike Wood, agreed to be a guarantor for part of their bank loan.
"It really helps relieve a lot of stress, but only if you have a very good relationship with the person," Victoria said.
"We would have eventually been able to do it without him, but we wouldn't have been able to do it before our daughter came so we are so grateful to him that he stepped in and helped.
"We are definitely in a better position, once you're in your first home you can only go up."
The McHardys had only a 10 per cent deposit saved and because Cory had been recently self-employed, he did not have enough earning history to qualify for a mortgage.
"We really wanted to have our own home before [Emily] arrived," Victoria said.
McHardy's father agreed to be a guarantor for 10 per cent of their loan, to take them to the 20 per cent the bank wanted.
The deal was done at the end of 2013 and the McHardys bought their home for $329,000. Victoria was eight months' pregnant.
Victoria said her father didn't have any concerns about the arrangement.
"I have been with my husband eight years and he completely trusts both of us and knows we are capable of keeping bills paid," she said.
"Once we have enough equity he will be out of the contract."