It was really nice having Belinda and her partner Rob around for evening dinner last Sunday. Conversation was bubbling along just fine until; ‘Mum and Dad, we have just seen a great little property and you know how much we hate that grotty rental and how hard we have been saving for a deposit, could you help us out - please.’
Now that fictional, but all too real, scene is either a conversation starter or pleasant evening stopper, depending on your point of view. While we all like to see our families making progress and will do much to help that process there is a huge difference when putting your own assets, security, income or lifestyle on the line.
But it seems with property prices the way they are and mortgage providers falling over themselves with up to 80 - 90% or more, financing offers, many families are being roped in to help out.
Most will be fine, but there is growing evidence that many do not always understand the risks involved.! It does not matter how wealthy folk are the asking to provide security or put up a guarantee for somebody else’s debt carries significant risk and obligation. Please make sure you take very good advice before getting either emotionally hooked on the idea or allowing a personal guarantee or security to be taken against your assets.
There is also the myth that our main banks are in some way friendly toward financing the budding business owner – wrong, they are not interested one bit in business lending - if not secured by that good old kiwi 500 sqm block (used to be quarter acre!) and Mum and Dad’s house will do just fine thank you.
There are further issues around, gifting, taxation, relationship property and management of the debt should something not go to plan that also need careful understanding – again, I implore you to get good advice.
Recently, I did see an example of a bank really helping a young couple to get ahead. Grandparents in this case had been asked to help. The couple had had an average credit record but borrowed nearly all the required funds for the purchase. The bank provided the mortgage funds on the condition that the Grandparents maintained a similar sized term deposit at the bank during the course of the loan, and provided a guarantee via their family trust, on top.
The bank was able to pay interest on the term deposit at around 6.00% per annum, pre tax of course. The loan was at a little over 8.25% (post tax). When I asked the Grandparents why they did not just lend the funds direct, they suggested they did not want to take the risk, but were keen to help! Their risks were huge – but not at all understood. Needless to say that is now not the case.
Original Article published November 2006
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