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Rise of the ‘gran bank’: Why helping grandkids buy a home could cost you
By Rachel Lane
There has been a lot of talk about the bank of mum and dad helping first homebuyers into the market. But there’s another generation who is helping too (and getting less airtime): grandparents.
The “gran bank” are more likely to offer up security via going guarantor on a loan rather than cash to help to boost the borrowing power of the grandkids. But while they may not be handing over cash, there is still plenty of risk involved including implications for your pension and ability to fund aged care if it all goes wrong.
When family arrangements go wrong the price can be much more than money.Credit: Dominic Lorrimer
Giving cash to help the grandkids can create a pension double whammy where your investments are reduced while being assessed until the money is repaid if it’s a loan – or for five years if it’s a gift.
As a result, many grandparents may prefer to be a guarantor. The age limit on being a guarantor varies, some banks will allow guarantors up to age 75. Having a guarantor can enable the grandkids to borrow more, in some cases up to 105 per cent of the property value. It can also reduce the loan to value ratio (LVR) below the threshold at which lender’s mortgage insurance (LMI) is required.
Paul Dwyer from Team Australia Mortgage Solutions gives the example that if the grandkids want to buy an $800,000 home and have saved $85,000. The stamp duty and land transfers will be around $45,000 leaving them $40,000 (5 per cent) for a deposit.
Because their LVR exceeds 80 per cent they need to pay LMI of $36,000. If the grandparents want to reduce the grandkids LVR below 80 per cent they could use $160,000 of the equity in their home as a guarantee, saving the grandkids $36,000 in lenders mortgage insurance.
If you are thinking about being a gran bank, make sure you seek legal and financial advice so that you understand the arrangement.
Being a guarantor can seem like a great solution, on the surface it doesn’t cost you anything, doesn’t affect your pension and the grandkids can save a significant amount of money. But you need to think ahead.
The obvious issue is that the grandkids default, making you responsible for the loan. From a Centrelink point of view, if you repay the loan that’s a gift. You can have it treated as a debt owing and be assessed only on the amount that can be recovered with no deeming applied, but you would need to take legal action against the borrower (your grandkids) – not something most families are inclined to do.
Other financial implications include if you want to borrow against the home or sell it. If you decide you want to release some of the equity, perhaps to fund renovations, a holiday or care, you may find it’s not possible without the guarantee being removed. And if you need to sell the home to downsize or move into aged care home then the guarantee would have to be removed first.
Removing the guarantee reduces the security for the loan, so the bank may refuse or ask for other security to be provided. Without the guarantee the grandkids may need to pay lenders mortgage insurance (or come up with funds to avoid paying it) or refinance the loan.
In the worst-case scenario, the home may have dropped in value, and they may be unable to borrow as much as they need, forcing the sale of their home. The domino effect is that as the guarantor you are responsible for the amount you have guaranteed, which, if you don’t have the funds to pay, may in turn force the sale of yours.
If you are thinking about being a gran bank, make sure you seek legal and financial advice so that you understand (and document) the arrangement and reduce the chance of any nasty surprises down the track. When family arrangements go wrong the price can be much more than money.
Rachel Lane is the author of the bestselling book Aged Care, Who Cares? and Downsizing Made Simple with fellow finance expert Noel Whittaker. The new edition of Downsizing Made Simple is now available online.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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