13 Jul Screwed by the brood
Some parents who have guaranteed their children's property purchases have lost their own homes as a result. Photo / Janna Dixon
By Andrea Milner
A growing number of older people are finding themselves struggling to pay their children’s mortgages. And the problem is set to worsen as banks encourage families to collaborate financially to circumvent tightened lending criteria. During the last housing boom, many parents helped their kids get into homes.
Financial adviser Kathy Jarrett says often they were convinced by their children’s mortgage broker, real estate agent or banker, ignoring advice from their own advisers. Commonly they mortgaged their own homes and gifted loan proceeds to their children on the understanding that the kids would be responsible for the repayments.
“But now they’re quietly having to pay themselves, sometimes having to come out of retirement and try to get work,” Jarrett says. Mortgage adviser Bruce Patten says it is becoming even more common for parents and children to mingle their finances because of banks’ higher deposit requirements.
Banks still want to capture the market that needs to borrow more than 80 per cent of a property’s value, so they’re promoting parental guarantees, joint borrowing and gifting. Broker Kim Lyons of Be Mortgage Free says joint borrowing is “really ugly – [the parents are] in hook, line and sinker, so the kids can just up and off and mum and dad are left with the whole debt, especially with the short duration of some relationships now”.
Daniel Feller of Financial Pictures says banks have done “a great marketing job, pushing people into these products and grabbing more security by way of parents’ property and guarantees”. Patten says he is dealing with more loans now than he has in the past eight years where parents are used as guarantors or stump up the deposit to get their children into a home.
Property lawyer Tim Jones of Glaister Ennor says if the bank sees inadequate security in the children and the house they’re buying, they ask for a parental guarantee secured over the parents’ home. Frequently, parents keen to help out their kids ignore the risks. He has seen well-meaning parents end up losing their homes.
Patten says parents are also getting loans to help bail children out of mortgagee sales, buying time so the children can sell the property themselves. Lawyer Terry Carson says in some cases parents buy the house off their kids to pay off the bank, then rent the house to them in the hope they will be able to repurchase it down the track.
Demographer Bernard Salt says baby-boomers’ childhoods were dominated by austerity, and pride in their middle-class prosperity rouses them to provide their children with the young adulthood they never had. “Suddenly parents are funding their Generation Y kids’ lifestyles – their OE, the purchase of a house and the mortgage repayments.
And what’s more, Generation Y pretty much expects it.” Salt says Gen Y has tertiary education loans, cellphone debt and travels extensively – costs that were not previously part of a 20-something’s life. Feller says if parents want to help, it is better to keep their affairs separate from their children’s and simply lend or gift money rather than offer security and guarantees. Jones advises parents to get independent advice. “Be prepared to say no if you have to, and if you do say yes, be aware of the risks.”
Parents put home on market as help rebounds When Mr and Mrs P’s son needed funds to open a bar in Auckland, the retired couple lent him $60,000, secured against their home. They had a $65,000 mortgage already but as their home’s value was $675,000, the combined borrowings amounted to only 18 per cent of the property’s worth.
Their son promised to pay the interest on the $60,000 advance, but the business foundered and the loan fell into arrears of $7000. His parents, whose only income is from a pension and superannuation, tried to negotiate lower repayments with their bank, but it threatened a mortgagee sale.
Mr and Mrs P were forced to re-finance more expensively with a second-tier lender. Their son went to Australia and he is not making regular repayments. Meanwhile, his parents have to forgo having holidays or a dinner out as they cut their expenses to meet their higher mortgage payments.
They plan to sell their home and downsize to a smaller house. “We wanted him to make something of himself without the problems either of us had coming up through hard times,” says Mr P. “We see it as a responsibility to make sure he doesn’t have to live like we did in our early years.”
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