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Lenders crackdown on Bank of Mum and Dad

Those hoping to break into the property market with the help of the Bank of Mum and Dad may now face a harder time, with a number of lenders introducing strict new guidelines covering guarantors of home loans.

The guidelines come as a response to the new Banking Code of Practice that was introduced in June and aims to help borrowers and their parents fully understand their obligations and risks when taking out a loan.

The Bank of Mum and Dad has been gaining in popularity in recent years, and while it can be a great way for some to get a leg up into the market, it has also been known to have caused family rifts and leave some parents financially destitute.

Despite this, the Bank of Mum and Dad is one of the top 10 lenders in the country. According to the Australian Financial Review loans from parents to their children has grown by 300 per cent over the last four years, with Aussie parents lending over $20 billion to their offspring each year.

Parental assistance can come in many forms, whether it’s gifts, loans or repayments, but it can become a particular issue when a parent becomes a guarantor and doesn’t fully realise the financial implications of it.

Becoming a guarantor for a home loan is a massive responsibility that could have dire consequences if things don’t work out, and both parents and their children may not plan for situations such as a change in income, break-ups or another change in circumstances that might impact repayments.

New rules being introduced by lenders will hopefully help all parties plan for contingencies and avoid financial disasters.

Guidelines being introduced include:

– Tougher scrutiny on loan guarantors. They will need to provide more information about how it will impact their finances.

– Evidence will be required that a guarantor obtained legal advice, or reviewed terms and conditions.

– Co-borrowers that don’t stand to gain a substantial benefit from the proceeds of a loan will need to prove that they understand its risks.

Overall, it’s important that all parties are completely aware of their risks and responsibilities when it comes to taking out a home loan, as things in life don’t always go to plan.

Protect yourself and your relationships with your family by getting independent legal and financial advice.

 

Source: The Australian Financial Review

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