Your lender may ask you for a guarantee from someone, such as your parents, if it thinks you might not be able to cover the loan repayments yourself. If you don’t have a deposit, a guarantee may also mean you don’t have to pay mortgage insurance and have a wider choice of loans.
Guarantors usually use their home as security, and traditionally they were liable for the full amount of the home loan. Now new-style versions like the ANZ Family Guarantee allow the guarantor to limit their liability to a specific portion of the home loan, such as 20%. However, even in this case, if something goes wrong and the borrower gets into default, the bank can sell their home and/or the guarantor’s home.
The other problem with guarantees is that they can apply for the full period of the loan. During that time the situation of the guarantor (typically parents) can change. At the start of the loan they may still be in the workforce and have an income they can use to support the borrower in case of a problem (such as unemployment). However, later on they may be pensioners and their home is their only asset.
Another example of a 'home loan with guarantor' is CBA Family Equity. It has five options, three of which are variations of traditional guarantees. The other two options give the guarantor more security:
Second mortgage — the guarantor takes out a second mortgage on the borrower’s property, and is responsible for the repayments on it. If either fails to make loan repayments, the bank will sell the borrower’s property only.
Gift of loan proceeds — instead of giving a guarantee, a family member, such as your parents, takes out a separate loan on their property and gives the loan proceeds to you. The family member is responsible for the loan repayments on their loan only. Beware — if you’re on Centrelink support payments, you’ll need to check the gifting rules.
As a guarantor you have rights; for example, you can ask to receive statements for the loan. Make sure you keep track of them, so you can act in case of problems. If you’re interested in a guarantee or being a guarantor, ask the lender:
- What would happen in the worst-case scenario — could the guarantor’s house be sold, and under what circumstances?
- Are there any extra costs, such as for a valuation of the guarantor’s home?
- Can the guarantor be released from the guarantee and under what circumstances — for example, once the borrower has enough equity in the property?
- What’s the cost of releasing the guarantor? Typically the borrower would need to refinance, and while the lender might waive the application fee, other costs such as mortgage stamp duty might apply.
If you decide to go for a guarantee check the Consumer Credit Code, which offers guarantors protection, at www.creditcode.gov.au. The code specifies a number of conditions that must be met before a guarantee for a loan could be enforced.
Bank wants to sell parents’ house
Anna and Bill (not their real names) from Melbourne live on a Centrelink pension. They originally come from Europe and have limited English skills. As well as owning their home, they owned a property that they gave to their daughter and son-in-law, Mary and Paul (not their real names), as a gift.
Mary and Paul took out a $380,000 loan with a bank. Anna and Bill say at that time they received a short visit from the bank manager at their home, asking them to sign some documents. They say they didn’t understand these documents were a guarantee, but understood it was something to do with the gift of the land.
Two years later the bank sent them a letter saying the loan was in arrears and demanding they pay it. Some months later the bank issued legal proceedings to enforce the debt against not only the borrowers, Mary and Paul, but also the guarantors, Anna and Bill.
The bank then obtained a judgment from the Victorian Supreme Court against one of the guarantors only, Anna, giving it the right to sell Anna and Bill’s family home. The Consumer Action Law Centre is currently negotiating with the bank on Anna’s behalf.
CHOICE verdict on loan guarantees
A guarantee is a very risky option for the guarantor. It’s important to get legal and financial advice and make a long-term plan — what will happen if, 10 years down the track, your child divorces their partner, for example? Consider the option of borrowing to lend to your children instead, or simply giving them money.