Security Guarantors - Personal Borrowers
Security guarantor/family guarantee allows a family member to provide their security to the borrower to assist with securing a loan. Guarantors are used for security purposes only and not used for serving debt, the clients must be able to service the total loan requirements.
Providing a security guarantor is an alternative to customers borrowing above 80% Loan to Value Ratio (LVR) and incurring Lenders Mortgage Insurance (LMI) or in the absence of funds being gifted to the borrower/s.
Guarantee security usually needs to be provided by immediate family members, spouses, parents or siblings and all securities will need to meet the Lender’s acceptable security policy.
Being a guarantor is a significant responsibility that carries financial and legal risks. It's important for potential guarantors to fully understand the obligations and carefully consider their ability to fulfill them if the primary borrower defaults.
As the Broker, it’s essential to ensure that all parties involved understand their roles, responsibilities, and the implications of the guarantee.
Difference between a Co-borrower and a Guarantor
A co-borrower is someone who chooses to borrow money with another individual or business. All parties share equal responsibility for repaying the loan, as per the loan contract.
A security guarantor is someone who provide additional security to support a loan application. They will become liable for the amount they have guaranteed in the event the borrowers can’t meet the repayment terms and conditions on their loan contract
Security Guarantee Overview and Example of Structure
With most lenders who take security guarantees, you would expect two loans to be submitted to limit the guarantor’s liability. Please refer to and be guided by each Lender’s individual requirements when setting up loans with guarantors.
Example:
Loan 1 – being the purchase loan with a max LVR of 80% – secured by the property being purchased
Loan 2 – being the balance of the Loan/residual debt – secured by the property being purchased + plus additional security being provided by the security guarantor
Other Considerations and Keeping Good Notes
Agreeing to be a guarantor and providing a guarantee involves significant financial risks, so it’s important for individuals to fully understand what they are entering into. Good, detailed notes and record keeping is paramount.
Educating the Guarantor:
1. Explain the Role and Responsibilities:
o Clearly outline the responsibilities, obligations and the extend of their liability to the guarantors in a simple and easy to understand language.
o Emphasise that the guarantor is legally obligated to repay the loan if the primary borrower defaults.
2. Outline the Risks:
o Discuss the financial risks involved, including potential impacts on the guarantor’s credit score and financial stability.
o Guarantors should seek legal and financial advice from an independent third party to fully understand their obligations, risks and any impact on their financial situation. Legal and financial advice should be sort before providing a guarantee and any supporting security.
3. Due Diligence:
o Always get responses and emails directly from the guarantors, not via the borrowers.
o Guarantors should be interviewed separately, free from any outside influence or pressure.
o Detail all discussions held and email correspondence with the guarantors, within Infynity and upload all supporting documents relating to your interactions with the guarantors.
o Detail all discussions held with the borrowers, within Infynity and upload all supporting documents.
o Recording all interactions with the Lenders regarding the loan structure.
o Maintain transparency and honesty in all dealings with both the primary borrower and the guarantor.
o Avoid any conflicts of interest and prioritise the best interests of all parties involved.
o Ensure the confidentiality of all personal and financial information provided by the guarantor.
o If you feel that the guarantor is being pressured to provide the guarantee, you must NOT do the loan and report your suspicions, and seek advice from the Oxcel compliance team – [email protected]
Completing a SOCA with Guarantors
It is important that you create your Client Account within Infynity, correctly from the beginning, this means creating the full client profile.
• Create the client account via Accounts tab >> New Client Account. All clients regardless of the product type or structure must have a client account created in Infynity
• Create and add in all applicants and guarantors as required
The Compliance team have advised that the SOCA should only show the applicants. Outlined below is best practice for guarantor loans. You can also refer to the quick reference guide and recording on completing a SOCA with Guarantors.
• Create your client account structure as normal in Infynity (show all applicants and guarantors).
• Add in the additional security being provided by the guarantors and assign the ownership of that asset to the guarantors as normal.
• Prepare your SOCA as normal
• Add all securities for the loan within the Loans, Securities & Commentary tab within the SOCA,
(primary security and the additional security.
• Make good notes within the SOCA about the additional guarantor’s security being taken
• In the SOCA toggle on your applicant/s only, as they will be signing the SOCA and only their details
and financial information will populate to the SOCA.
• Before passing through to the AOL, Edit the Mortgage Finance Loan application by using the “edit” option and toggle on all loan parties including the guarantors within the application (following 1 & 2 steps below).
• Pass the data through to AOL as normal – all loan party’s details (including the guarantors) will populate to the Lender’s application within AOL for your validation.
Upload all compliance and supporting documents to the Documents tab within Infynity against the loan application.
Disclaimer: This information is current as at the time of each QRG publication. It is a general information guide only.