Loan Tip: Different types of Guarantees for Loans

Loan Tip: Different types of Guarantees for Loans

Basically, there are 2 types in guarantees in relation to borrowing money. They are

a) Security Guarantees
This is where the guarantor gives their property as security for the loan


b) Servicing Guarantees
This is where the guarantor allows their income to be used for servicing.


Example of a Security Guarantee

Bart wants to buy a property, but he does not have much of a deposit – 10% is all he has so he will have to pay LMI.

To avoid the LMI Bart asks his dad to give a security guarantee by using the dad’s property as additional security for Bart’s loan.

This way the overall LVR will be low and no LMI is payable.


Example of an Income Guarantee

Bart sets up a company as trustee of a trust to buy property.

The trust is new and has no income, but it does have a 20% deposit.

Bart is the director of the company and the lender will require a personal guarantee from Bart and his income (and debts) will be used to work out serviceability – in addition to the proposed rental income of the trust.

This allows the trustee to borrow even where it has no income.

 

hi Terry, in a "security guarantee" kind of situation, is Bart's property and Dads property now cross collateralized? Should Bart be looking to get the guarantee released soon as his property appreciates to the 80% LVR mark?

 

Yes parental guarantees involve cross collateralisatiom Of securities

 

That's really a personal decision. I bet Homer would be keen to get his property released asap, but Bart might want to take things more slowly - be might be debt recycling the loan for example

 

Security may be a registsred security eg mortgage which is a impact on title when its registered. A search will show Westpac has a mortgage over title. . It may also be unregistered and not appear but such security is exposed to challenge. A charge may also be noted on title eg a caveat although a mortgagee may not consent. A caveat is a caution to those dealing in the title that may limit title until the caveat is removed with agreement.

Security may also be over other assets eg a floating charge ...A fixed charge. Or a registered charge through the PPSR https://www.ppsr.gov.au/ (often for vehicles and plant items) Many banks take this when they lend to trading companies eg Woolworths or smaller companies. Its a charge over no or some specific assets and a lender can demand or even seize or seek court enforcement of a judgement. eg seize warehouse stock etc. factoring is often a charge over the receivables. This allows the bank to collect what is owed from the customer. Its benefit is the receivable is a asset that is used as security rather than hard assets.

Then there are guarantees. These are akin to a promise to meet the obligations of someone (slse?). Very common with trading comanies eg Director/s may give Bunnings a guarantee to meet the obligations of the company if it defaults. The guarantee is generally given by a Director and can often apply to lots of suppliers with no record of this signiifcant matter. May also be a parent allowing their title to additionally secure adult child borrowing or some of it.

Then there are statutory charges. Good examples are unpaid employee super and tax withholding. The ATO can order a Directors Penalty Notice which imposes the company obligations to pay a unpaid debt to EACH Director. So a Director can be held liable aftre a company enters administration for these sorts of debts. They are not just a liquidation issue. It may lead to a Director becoming a unsecured creditor if they settle the tax debt

All such issues should be given legal advice before a lender agreement is signed. Some lenders will also require the party obtains independent legal advice for such arrangements. They should never just accept the lender terms without actually getting that advice.