Would you Accept Debt as your Inheritance?

Hands holding a piggy bank and a house model
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Finding out you are getting an inheritance can be an emotional experience. You are mourning the loss of a loved one, and that person has chosen you to receive their lifelong legacy.

The gift left behind can help improve your financial situation.

Yet sometimes, inheritances can be a toxic present.

In Spain, it seems that inheritances are becoming the latter. The number of people rejecting them has increased considerably. One in 10 people are now refusing to accept them.

So why are Spaniards renouncing their inheritances?

You see, when you get an inheritance you do not only get money and assets. You can also receive debt.

In Spain, many parents acted as guarantors for their children — or other family members — during the 1997–2007 Spanish property bubble.

Like Australia today, it was the only way for many people to buy their first home. Property values rose six times higher than the average salary, and it priced much of the population out of the market.

So parents put their homes on the line, to get their children on the property ladder. Yet their well-intentioned gesture backfired.

The 2008 global financial crisis brought property prices crashing down. And once prices tumbled, asset values no longer covered the amount of debt.

Now those parents are passing away. Their heirs are receiving assets that are sometimes guaranteeing an amount of debt greater than the house’s value.

Guarantor Loans Being Used To Get Into The Property Market

In Australia, new research from Mortgage Choice shows that guarantor loans have increased significantly in recent years. Mortgage Choice Chief Executive John Flavell said:

Given that property prices continue to rise month after month, it is little wonder why so many first home buyers are finding it difficult to put a foot on the property ladder without some form of financial support.

By having a family member go guarantor on a home loan, first home buyers are not only able to get their foot on the property ladder sooner rather than later, but they can also potentially avoid paying Lenders Mortgage Insurance.’

The fact is, first home buyers are priced out of the property race, especially in New South Wales and Victoria. The share of first home buyers has now fallen to a record low of 13.9%, the lowest in the last decade.

In the past six months, Sydney and Melbourne prices have increased by a yearly rate of 19% and 12%.

Yet salary growth is sluggish. Sydney’s price to income ratio increased from four in 1981 to 12.2 in 2015. That is, in 1981 it took four years of your income to buy a property. Not it takes 12.2.  Melbourne’s has increased from 3 to 9.7 during the same period.

middle-income-housing-affordability in australia 1981-2015

Source: abc.net.au

The fact is, property prices continue to rise faster than wages. And parents are feeling the pressure to help out their children.

20% of current mortgage holders had some financial form of help from their family — in Sydney and Melbourne the number jumps to 23%. And one of the ways they are getting help is through guarantor loans.

With a mortgage guarantee, the lender takes a mortgage over the guarantor’s property. Yet the amount the guarantor takes on can vary from 20% of the property value to the full loan amount.

Mind you, the amount of the loan is on today’s property values. So, if property prices came crashing down, much like what happened in Spain, you could end up owing more than what the property is worth.

And parents in Australia usually have more than one child. So some parents are guaranteeing for more than one property, increasing their risk.

Mortgage Choice CEO John Flavell expects these loans to continue growing.

Provided the first home buyer can comfortably make their regular mortgage repayments, there is very little risk associated with this type of financial assistance. As such, I would expect to see continued growth in the proportion of first home buyers using guarantors.’

The key word here is ‘provided’. So, if interest rates don’t rise, if employment stays stable, if property prices keep increasing, if they don’t get ill, if…then first home buyers will be able to make their regular mortgage repayments with ease. Those are a lot of ‘ifs’ for my taste.

And if any of these ifs were to happen, ‘the very little risk’ could turn into you and your children losing your homes to cover the debt. Or your children renouncing to your inheritance, because it’s guaranteeing too much debt.

Regards,

Selva Freigedo,
For The Daily Reckoning

PS: A fallout from too much global debt could be the catalyst that ignites the next great crisis of our time.

Yet according to The Daily Reckoning’s Vern Gowdie, we’re already in the throes of this crisis.

Vern is the Founder of The Gowdie Letter and Gowdie Family Wealth advisory services. As one of Australia’s top financial planners, Vern says the next crisis is already in motion.

Australia has gone through two credit bubbles in its history. The third, and latest, has built up over the past 65 years. When it pops, the impact will leave a lasting mark. One that will make the 2008 financial crisis look like child’s play.

The fallout of this crash could damage your wealth. But you can safeguard your wealth from the worst effects of the coming crisis, provided you act now.

Vern will show you how to do this, and more, in his latest report, ‘Global Financial Crisis 2016: 3 Crisis Scenarios, and How They’ll Impact Australia’. To get your free copy today, click here.

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