There’s been much discussion about the “bank of mum and dad” aiding first-time homebuyers. However, another often overlooked yet crucial group is also stepping up: grandparents.
This so-called “gran bank” tends to support by acting as guarantors for loans rather than providing cash directly, thereby enhancing the borrowing capabilities of their grandchildren. Despite not parting with cash, this approach still carries significant risks, including potential impacts on their pension and ability to afford aged care should things go awry.
Offering cash to assist grandchildren can lead to a pension double whammy: your investments are reduced and assessed until the money is repaid if it’s a loan, or for five years if it’s a gift.
Consequently, many grandparents opt to be guarantors. The age limit for guarantors varies, with some banks allowing it up to age 75. Acting as a guarantor can allow grandchildren to borrow more, sometimes up to 105% of the property’s value. It also helps lower the loan-to-value ratio (LVR) below the threshold where lender’s mortgage insurance (LMI) is required.
Paul Dwyer from Team Australia Mortgage Solutions illustrates that if grandchildren aim to purchase an $800,000 home and have saved $85,000, the stamp duty and land transfers would total around $45,000, leaving them $40,000 (5%) for a deposit.
Since their LVR exceeds 80%, they would need to pay $36,000 in LMI. If grandparents use $160,000 of their home’s equity as a guarantee to lower the grandkids’ LVR below 80%, it could save them that $36,000 in insurance costs.
If considering becoming a “gran bank,” it’s crucial to seek legal and financial advice to fully understand the commitments involved.
Being a guarantor might seem like a cost-free solution that doesn’t affect your pension while saving your grandchildren significant money. However, foresight is essential.
The primary risk is the grandchildren defaulting, making you liable for the loan. From a Centrelink perspective, repaying the loan is viewed as a gift. You can treat it as a debt owing and only be assessed on the recoverable amount without deeming applied, but this might require legal action against your grandchildren—not a preferred route for most families.
Additional financial implications include the difficulty of borrowing against or selling your home. If you wish to tap into your home’s equity for renovations, a holiday, or care, you might find it impossible without removing the guarantee. If you need to sell the home to downsize or move into aged care, the guarantee must be removed first.
Removing the guarantee lessens the loan’s security, potentially leading the bank to refuse or demand other security. Without the guarantee, your grandchildren might need to pay LMI or find other funds, or refinance the loan.
In the worst case, if the home’s value drops, they might not secure the needed amount, forcing a home sale. As the guarantor, you’d be liable for the guaranteed amount, potentially leading to your home’s sale if you lack the funds.
If you’re thinking about becoming a “gran bank,” ensure you get legal and financial advice to understand and document the arrangement, minimising future surprises. When family financial arrangements fail, the costs can extend far beyond money.
