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Once upon a time in our so-called “lucky country” you borrowed money from the bank, bought a house, worked hard, paid off your mortgage and enjoyed your retirement in relative comfort.
But with the recent housing stress and economic downturn, more older Australians than ever are risking their homes and pensions when guaranteeing a loan for their children.
Data from Legal Aid NSW shows that amongst their cases involving financial products, a quarter of cases involved people who were Arabic speakers and 16 per cent involved people from South Eastern European communities.
Now, Legal Aid NSW in partnership with The Aged Rights Service (known as TARS) has set up The Borrowers Beware project, to provide free legal assistance for older people in NSW, including those from culturally and linguistically diverse communities.
Legal Aid solicitor Rebekah Doran says there's growing concern in the community.
“We see a lot of people, who are older people, who have been involved in borrowing money against their house or guaranteeing loans for their children and there's a number of risks involved in those types of products.”
For example, you can be at risk of losing your home:
- if you guarantee a loan taken out by your child
- if you take out a loan in your own name, with the intention that your child will pay off the loan
- if you transfer the title in your home to your child so they can use the property as security for the loan or
- if you take out a reverse mortgage.
Ms Doran says if your home is the only asset you have, you should ask yourself some questions before going guarantor.
“If you're thinking about borrowing money against your home to give to your children on the basis say, that they agreed to make the loan repayments, the most important question to ask is: are you prepared to sell your home if things go wrong? Our number one tip would be that if you're not prepared to sell your home in the events that your kids can't pay properly their repayments, then you should think very carefully before borrowing money for the benefit of your children or guaranteeing one of their loan.”
Many parents tend to think everything will go well when becoming guarantors. Unfortunately, Ms Doran says, life often gets in the way.
“Recently we helped out a couple called Samira and Ali, we changed their names to protect their identity, and they borrowed money against their house to help out their daughter to start a business. They were really keen to help out their daughter because they didn't want to see her struggle the same way as they did. Samira and Ali worked very very hard over the years to buy their home and finally managed to pay it off just before they retired. Unfortunately their daughter's business didn't go so well and she ended up not being able to keep up with the payments, so they came to us, because the bank has started legal proceedings to take their home and force them to pay the loan that their daughter couldn't pay.”
Ms Doran says Samira and Ali's home was at risk. And then it got worse.
“And this is a very upsetting situation for Samira and Ali, because Ali's health was very poor and the stress of worrying about their home only made things worse. And their relationship with their daughter also had gone sour, because they never realised that their home could be sold if she didn't pay the debt. So it's really important even if you want to help your children to get ahead or if they are in a tough situation, it's important for the whole family for you to remember to protect yourself and to make sure that you get advice about what it could mean for you.”
If your child is unable to take out a loan on their own, it is because the bank might not consider them to be a “good risk”. Rebekah Doran says before becoming a guarantor, you need to be realistic about it and think carefully before you sign. But most importantly, she says, you need independent legal advice.
“If you are responsible for making loan repayments and you don't keep up with those repayments, then you can have a bad credit listing placed against your name. So if you're approached by your child or you're thinking about going into a financial arrangement with your children, it's really important to get independent legal advice from the very beginning.”
Rebekah Doran says you may want to help your children, but it may not be realistic to do so. Not being able to help doesn't mean that you don't love them. She says you have a right to protect your own interest.
“Absolutely it's okay to say no. Many parents, particularly now that house prices in Sydney are so expensive, do feel like that they are responsible for helping their children financially. However it's critical to make sure that you understand all the risks.”
If you lend money to your children it is important that you make it clear in writing whether you intend to give the money as a gift or a loan. Rebekah Doran says people don't realise that giving away money can affect their pension.
“Centrelink have rules about how much money you can give away each year. At the moment you can give away $10k a year up to a maximum of $30k over five years without it affecting the rate of your pension. However if you borrow a large amount of money, for example, get a loan against your home to give it to your children, then that can reduce the amount that you are entitled to under your pension, and in some cases it can even mean that you are not entitled to your pension at all.”
Ms Doran says in many cultures older people often only consult family members when making financial decisions. However, she says it's important to get legal advice before you enter into any complex financial transactions, particularly those involving your home.
“Many parents want to help out their children, particularly now that housing is so expensive in places like Sydney and Melbourne and sometimes it can be really hard to say no to your children. But what we would say is that if you do all the right things at the beginning and you get advice, you check with Centrelink and you get the arrangements in writing, then you're protecting you and your children down the track. What you want to make sure is that if things don't go to plan, so for example if someone gets sick, or they can't work anymore or their business doesn't go well, that you have a plan in place for what will happen and that you protect you and your children in relation to the transaction.”
The Borrowers Beware project consulted broadly with a range of providers, including Multicultural Resources Centre, Arab Councils, Diversity Services and CALD Community Welfare organisations.
Legal Aid NSW and TARS have developed information brochures in several community languages including Persian Farsi, Korean, Tamil, Vietnamese, Hindi and many others.
Rebekah Doran says they also work closely with new and emerging communities.
“We have a number of legal services now that are based at community organisations such as Migrant Resource Centres, so that we can better work with various community groups. This is also to make sure that translating and interpreting services are available for people for free when they come to Legal Aid or The Aged Rights Service, so that language isn't a barrier to people seeking assistance. And we also have a number of solicitors from a whole range of backgrounds.”
While helping your family is paramount, so is your financial security in retirement. Rebekah Doran says it’s never too early or too late to seek legal advice.
“If you are thinking about getting into an arrangement where you borrow money against your home for the benefit of your children or guaranteeing a loan, it's really important to get advice early. That said, if you are already in this arrangement and it's not going so well or you have letters from the bank, then it's never too late to get advice either. So, if you need help with a matter like this, you can contact The Aged Rights Service on 1800 424 079, if you require an interpreter you can contact them through TIS [Telephone Interpreter Service] on 131 450 and ask them to forward you to TARS. And either TARS or Legal Aid NSW will be able to provide you with some advice.”
In Victoria visit www.legalaid.vic.gov.au