Guarantees and Lending
In these challenging times for borrowers, particularly first home buyers, with the high residential property prices it can be difficult to raise a sufficient deposit to attempt to get into the market, notwithstanding the support by way of Government schemes. In many cases people must rely on family members to support them to get a foothold in the property market. That support could come by way of a ‘cash gift’ or it may come via a supporting guarantee. The latter is where a third party, generally a family member, will provide a formal written guarantee backed by a mortgage over the guarantors owned landed property in order to support a borrower. This is termed as ‘security support’. A guarantor cannot as a rule, provide ‘loan servicing support’ because lenders want to ensure that borrowers can demonstrate their own capacity, have their own income, to meet a proposed home loan commitment.
Recently the (BCCC) Banking Code Compliance Committee, the watchdog monitoring the bank’s adherence to the Banking Code or Practice, highlighted some shortcomings in terms of matters relating to such things as lacking of record management , keeping guarantor’s informed, relying on legal advice for enforceability rather than acting ethically with guarantors. The important point to note here is that Guarantors may not get protection they need in their dealings with the banks. Here are some important points to note which relate to acceptability and suitability of guarantors:-
Will the guarantor be using their own family home as supporting security? This can be an issue because lenders do not want to sell a property where a guarantor will potentially be evicted.
Are the guarantor’s aged?
Do the guarantors still work? This assists their position as being self-supporting .
What sort of financial position are the guarantors in? If they are as an example ‘self-funded retirees’ with substantial assets they may be suitable. They may have alternate property other than their family home that can be used as supporting security for a borrower’s loan?
Are the borrower’s in a stable relationship because if not, it could place a guarantor’s security property at risk of being sold should the borrowers relationship break down?
Lenders generally only accept guarantees from direct ‘blood’ relatives’, parents, siblings etc.
More often than not the cash gift option may be a better alternative for borrowers if family relatives are able to go down that path in preference to guarantees. I only make that comment because it completely separates the borrower from the guarantor in terms of the loan risk. It also can be more favourable in terms of the ‘time’ factor in that guarantees can be in place for many years. The borrower(s) can incur more loan set up costs this way, but they have to weigh that up against the positives of a standalone loan position and there is reward in that.
The above is simply written to trigger thoughts for borrower’s and guarantors to carefully consider their positions prior to looking to set up any home loan where guarantees will be involved. Of course guarantors & borrowers should have preliminary joint meetings with the lender / broker to ensure transparency in discussions, and the guarantors should always seek independent legal advice prior to entering into such arrangements.
If you are considering this situation either as a borrower or guarantor, please contact Michael on 65832211.