Watch out for guarantees: Ombudsman

Deborah Battell has published a guide, available online, for people considering offering a guarantee for someone else's debt.

It has been suggested that products such as Westpac's Springboard offer, which allow borrowers to shore up equity by securing part of the loan against a family member's property, will make guarantees more common for first-home buyers with small deposits.

Banks will be required to keep their lending to borrowers with a deposit of less than 20% to no more than 10% of their total loan books.

Battell said: "Many people we deal with are not as informed about their banking as they need to be. Learning from mistakes is bad enough but learning from mistakes you don’t realise you are making is much worse. We want to help people learn without the pain."

She said the ombudsman scheme regularly saw guarantees gone wrong and some people seemed not to know enough about what they were agreeing to.

“With restrictions on low-deposit mortgages taking effect from next month, it is possible more low deposit borrowers will seek guarantors to secure funding for their home loan, and it’s crucial all concerned are fully informed about what that involves in terms of financial risk.

“More often than not, a guarantee arrangement can work well, and is a useful financial tool. But we have found complainants with problems around guarantees are often not fully aware how being a guarantor can expose them financially."

Comments from our readers

On 2 September 2013 at 1:33 pm Lynne Bridge said:

I agree as what most people do not understand is that guaranteeing a loan can add the amount of that loan installment or debt to their own. This could compromise any future lending they may need themselves as the installment is looked at as an expense even if not being paid by them. However unless prices dived for properties in the hot area then there is little option for children to do this if they have not accumulated the needed funds.
What I would suggest is that the children also take out a life policy on the parents for the amount guaranteed or borrowed so that in event of their parents death the parents property is cleared of the additional debt. The children who have the loan or guarantee should of course insure themselves for the total debt held

Watch out for guarantees: Ombudsman

Family guarantees on home loans are tipped to become more common once LVR restrictions kick in next month, but the Banking Ombudsman has issued a warning that guarantors must be better informed about what their liabilities are.

Sunday, September 1st 2013, 9:20PM 1 Comment

Comments from our readers

www.GoodReturns.co.nz