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?”