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Parents face $50k guarantor hit as property prices slide
Parents who guaranteed their children’s home loans could face a $50,000 bill if falling property values and rising mortgage repayments trigger a sale, with new findings warning they may remain financially exposed for more than a decade.
Parents helping their children enter the property market could be putting their own financial futures at risk, as declining property values threaten to leave guarantors exposed to debts for up to 11 years.
New modelling has warned that falling property prices could leave first home buyers in negative equity, with parents potentially forced to cover tens of thousands of dollars if their children default.
The modelling by HomeLoanRates found that a 10 per cent fall on the average $610,000 first home buyer loan would bring the home value down to $578,000, leaving the owner $32,000 in negative equity.
The modelling showed that if that buyer then defaulted and the bank sold immediately, the guarantors would be left covering approximately a $49,000 shortfall after costs.
Praedium Partners accountant Jeremy Iannazzelli warned that falling property prices could turn parents’ efforts to help their children into a financial liability, threatening their own retirement plans.
“You’ll find that moms and dads are going to be hesitant and less forthcoming to assist their children with a guarantor loan, because no parent in their right mind will guarantee a deposit and a loan for their child when the property’s going down in value,” Iannazzelli told SPI.
With interest rates continuing to rise, adding pressure on household finances, Iannazzelli said parents could find themselves in a difficult position.
“The risk is in how long it may take to rebound or if that person does fall into financial hardship, mum and dad’s home could be up for grabs for the shortfall,” he said.
“Mum and dad are potentially locked from selling their home because they’re guarantors on the loan, which they probably thought would only be anywhere between three to five years.”
During this time, he warned that parents would be unable to transact on their home, restricting their ability to plan for their own future.
Additionally, he said that a drop in guarantor loans would soften competition for existing homes and housing supply in new builds.
“If they aren’t able to save up the capital and mum and dad were their lifeline for it, it’s going to reduce the amount of supply for people to transact on,” he said.
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“Mum and dad not feeling confident enough to assist their children with a guarantor loan will have a negative impact on the property market and will have a big negative impact on the new supply that comes to market as well.”
While parents were left financially exposed as guarantors, Iannazzelli said their children also faced difficult conditions.
He said that with property values declining, children were seeing their net equity position fall faster than they could pay off the debt.
“People always want to see that they’re progressing, and I think it’s disheartening, especially to the kids that have bought the home or the children that have bought the home utilising mom and dad as guarantors.”
“You think you’re improving your leverage position. But if you’re paying down debt and the value’s coming down, quite often you’ll see the value may come down a lot faster than what you’re paying down the debt. So your net equity position is actually getting worse, not better.”
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