The family guarantee over the parents’ home
Losa, 25, earns $64,000 and wants a $38,000 loan for a late-model car. She has a $9,000 credit card balance, $4,000 of BNPL debt and a thin credit file. The lender is willing to approve only if her parents, aged 68 and 70, guarantee the loan and provide a mortgage over their unencumbered home, worth about $810,000. The parents are retired, receive NZ Super of about $1,650 a fortnight combined and have $22,000 in savings. They say, “She’s our daughter - we trust her.” They have not seen a lawyer and do not want to because “it’s just a guarantee”. The lender’s mobile banker is under pressure to meet a monthly target and tells the parents the guarantee is “a formality”.
1. Advise the lender on whether to accept the guarantee and mortgage over the parents’ home, and what process must be followed.
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The lender should not treat the guarantee as a formality. A guarantee is a separate credit obligation, and the parents must receive clear disclosure of the amount guaranteed, interest, fees, enforcement costs and the fact that the lender may pursue them without first pursuing Losa. The lender must assess their financial position, not just Losa’s. Their only regular income is NZ Super, and a $38,000 debt plus interest would be difficult to service from that income without using their savings. If they cannot repay without substantial hardship, the guarantee should not be accepted.
The lender should strongly recommend independent legal advice and give the parents time to obtain it. It should not discourage advice or rely on the family relationship to rush the decision. A mortgage over the home is disproportionate security for a depreciating car and should be considered only if the guarantee is limited, the parents clearly understand the risk and the lender has documented their capacity. The banker’s “formality” comment is misleading and creates conduct risk. The file should record the disclosure, the parents’ income and assets, the advice warning, their decision and the reasons for accepting or declining the guarantee.
2. What alternative structures or conditions would be more proportionate, and what ethical risks must be managed?
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A more proportionate structure would start with Losa’s own capacity: a smaller loan, a larger deposit, a cheaper vehicle, or delaying the purchase while she clears the card and BNPL debts. The lender could offer an unsecured loan at a higher rate for a reduced amount, or a limited guarantee capped at a specific sum for a short period, rather than a mortgage over the parents’ home. If the parents do provide security, the lender should consider a limited guarantee with a defined expiry and no unlimited enforcement costs.
The ethical risks are significant: the parents are older, emotionally invested and may not understand that they could lose the home. The banker’s sales target creates a conflict between the lender’s interest and the family’s vulnerability. The lender must manage that conflict through escalation, a second review, a clear advice warning and a cooling-off period. It should avoid any pressure tactics and ensure the parents’ decision is informed and voluntary. If the parents decline legal advice, the lender should record that clearly but still explain the consequences in plain language. The lender should be prepared to decline the guarantee if capacity is not demonstrated.