Loan Tip: When can a Guarantee be Given for a Loan?

There are 2 types of guarantees

a) income guarantees, and

b) security guarantees.


A person can give a security guarantee by allowing the borrower to use their property as security for the borrower’s loan. This is usually limited to parents or it might be possible for brothers/sisters to give a security guarantee with limited lenders. It is also possible with related companies that own property, but there are various tax issues to consider, especially with Division 7A.


Income guarantees are generally more limited and can only be taken from spouses or individuals that are part of a company or trust. Parents cannot give income guarantees for their adult children and neither can friends.


Example

Bart cannot afford to buy a property because of serviceability reasons so he hears about parental guarantees and tries to get a loan using this parent’s property as security. But this doesn’t work because it is his income which is preventing him from getting the loan.

He then decides to set up a company as a trustee and will use this to ‘get around’ it. But this won’t solve the problem if Bart is the only director of the company, he would need to ask someone else, who is also a beneficiary of the trust, to be a director so their income could be used to qualify for the loan – but their debts will also be taken into account and this will also affect their serviceability for future loans too.

In either situation Bart or the trust will need to come up with enough money for the stamp duty and deposit too. His parent’s property could potentially be used as security for either situation.