Relatives told beware of mortgage guarantees

Beware becoming someone's guarantor.

Parents and grandparents are being warned to think carefully before handing over their nest egg to relatives desperate to buy a first home.

New Reserve Bank lending restrictions kick in tomorrow. The new measures will make it harder for Rotorua house hunters to get a home loan with less than 20 per cent deposit - sparking fears many first-home buyers will turn to family to help raise the necessary funds.

As the restrictions loom, Age Concern has issued a warning to its members, saying many parents may be pressured to lend their younger family members money or sign on as a guarantor for their mortgage.

Rotorua Age Concern manager Hillary Thole said she had not seen any instances locally, but many of the older people she dealt with were in retirement villages.

Because the lending restrictions were so new, it was difficult to tell what impact they would have, she said.

If she saw warning signs an older person was being put under pressure by family members, she would recommend they seek legal advice.

Age Concern chief executive Ann Martin said financial abuse was one of the major types of abuse suffered by older people.

Often when a grown-up child got into financial strife, they asked parents to dip into savings, or expected parents to front up with cash.

"The older person may end up in a situation where they have to move and re-buy into the market and they don't have sufficient funding to do that.

"It's just alerting people to the fact that you can say no or look at other options and you do need to look after your own future.

"At the same time you do want to make sure your children's future is secure so you're in a situation that can be quite a dilemma for an older person."

Ms Martin recommended older people discussed potential lending arrangements thoroughly first and sought legal advice before agreeing to anything.

Real Estate Institute New Zealand chief executive Helen O'Sullivan said while parents lending children money or being mortgage guarantors was nothing new, people had to be very careful it did not put them at any more risk than they were prepared to shoulder.

"If it's something that people are considering they absolutely need to get their own independent legal advice. Treat it as a separate transaction."

She suggested parents only provide a guarantee for a limited amount of money, rather than the whole mortgage.

Being a guarantor

* Bank loan guarantees are usually unlimited.
* If the borrower defaults, the bank can demand repayment from the guarantor.
* A guarantor will also be responsible for debt recovery costs.
* A guarantor's home can be taken and sold to pay the debt if it is used as security.
* If you have signed an unwise guarantee it's important to get legal advice immediately.

- Source - Age Concern