Calling a spade a spade: The trouble with guarantor deals

by Mackenzie McCarty25 Jan 2013

Why would someone who is not a direct family member offer to act as a guarantor on a first home buyer’s loan?   Malcom Bartley, director of finance brokerage B Debt Free, says there are really only two reasons: one, because you stand to benefit somehow from the transaction, or two, because you were coerced into signing on.

Neither reason, he argues, should allow the third party to be called a ‘guarantor’.

Yesterday, Australian Broker interviewed Melbourne broker Alexander Heifetz, who noted some lenders have changed their policies surrounding loan guarantors to include non-family members.

Heifetz warned that brokers are likely to be the ones who face repercussions if the deals go sour, but Bartley says this is just the first of myriad concerns.

“The main issue I have is that we call it a ‘guarantee loan’…If a mother wants to help her son, she should be allowed to do so. But when the local baker around the corner who has nothing to do with the family says ‘I’ll be a guarantor because you talked me into it’, there’s absolutely no logic in that. If I asked you to guarantor a loan for me you’d chuckle and say ‘bugger off’- unless you were going to benefit.”

Bartley warns such situations could even give birth to a third-tier industry where there would be opportunities for a business to provide equity to first home buyers to obtain a government grant while they stamp the difference.

“There’s a huge misunderstanding of the debt administration in this country – and there are groups out there that’re saying ‘if you’re in trouble come to us, we’ll buy your property and we’ll let you buy it back’.”

While Bartley acknowledges there could be some benefits to easing guarantor requirements – namely, it would help same-sex couples to act as guarantors just as opposite-sex couples do – he says the onus should largely fall on the lender if such transactions fall through.

He says non-family guarantors should state their reasons for making themselves so financially vulnerable.

“Anything that is not direct family must be related to a business transaction. That benefit must be identified before the guarantor can be put in a position of risk. No one will take the risk just because they’re a nice guy.”

Bartley says he’s also worried about the potential for elderly persons to become victims of coercion should unscrupulous home buyers choose to pressure them into acting as a guarantor.

However, regardless of whether you agree with the concept or not, Bartley says lenders need to call non-family guarantors what they really are.

“If you’re going to call a savage canine that rips people to shreds a ‘puppy’, that’s not a lie, but it doesn’t give the true description, does it?”






  • by Patrick 25/01/2013 9:58:09 AM

    Brokers are supposed to be licenced or authorised representative credit advisers, but we have a lot of loan salespersons and not enough real advisers in the industry. It is possible to both limit the liability of and provide some security to a third party, family or non-family party providing deposit gap support. The transaction appropriately structured . To explain in detail would be to give away my value add, as I am a true adviser not just a salesman.

  • by Kate Brown 25/01/2013 10:01:03 AM

    Surely the fact that guarantor clients are having to seek independent legal advice and sign a legal document stating they are fully aware of what they are doing, negates any concern for coersion? Yes, there are people out there in the industry, as well as clients themselves, who give the rest of us a bad name and make our jobs harder, but surely the banks are aware of the measures that need to be in place to prevent any fallout from guarantor loans???

  • by LH 25/01/2013 10:22:48 AM

    Sorry Kate, but using the “independent advice” backstop is weak sauce and is not looking out for the client. Having independent legal advice is dependent on the quality of the advice. You are putting every legal practitioner on a pedestal.
    Coercion can include the legal fraternity as well. You are also assuming that every guarantor will be asked “Do you REALLY know what you are getting yourself into?”.
    If one feels strongly about something (and coercion includes people who are convinced they are doing the right thing and cannot be otherwise convinced), try and convince them otherwise!
    The time has come for credit advisors to be JUST THAT!