With price of properties becoming unaffordable in sought after locations, parents are stepping in to help their children get on the property ladder. One of the most common way they’re assisting is by becoming a guarantor using the equity in their own property and on rare occasions, by being joint borrowers.

While guarantors are commonly used to help borrowers avoid lenders mortgage insurance (LMI) premium, joint borrowers assist with the servicing of the loan unlike the guarantors. A borrower and their spouse/ partner typically act as joint borrowers and banks normally only allow a borrower’s immediate family to be a guarantor.

Joint Borrower

The best way to think of a joint borrower is someone who will co-own the property with any other person on the loan application. Joint borrowers assume an equal portion of the mortgage liability as the primary borrower, their name appears on all of the mortgage documents and they are registered on the title. Most importantly, they have an equal responsibility in ensuring that the repayments are made.

It’s generally understood that the joint borrower will be contributing towards the mortgage repayments and their income and/or assets will assist with the loan serviceability.

Other points of note:

•   Joint borrowers usually have equal rights (joint tenants) to the property, though they can also own a share in the property (tenants in common with just 2 owners). Where there are two or more owners (tenants in common), a borrower can own just 1% of a property, depending on the equity contribution of each shareholder.

•   A joint borrower may be able to claim any tax benefits from an investment mortgage, such as interest deduction, unless they are tenants in common, then only percentage equalling their share of the interest expense will be claimable. Consult a licensed tax advisor to confirm what applies in your personal case.

• If a joint tenant owner dies, the property ownership is transferred to the remaining party where as in a ‘tenant in common’ ownership, only the share owned by passing party transfers to his or her estate.

The Guarantor

A guarantor is used typically to help primary borrower(s) avoid paying LMI, in this case the primary borrower usually has the income to support the mortgage but may not have sufficient deposit to contribute towards the purchase.

A guarantor doesn’t have the same property rights as a joint borrower since their name is only on the mortgage and not on the title of the property. Their role is strictly to provide guarantee so that the mortgage amount is less than 80% of the total value of all securities.

Unlike a joint borrower, the guarantor typically becomes liable for default only after the lender has exhausted all other means of collection against the primary borrower(s). It is important that the guarantor seek legal advice on their responsibility regarding any outstanding liability in the event the borrower defaults.

Guarantors are typically in better financial standing than the primary borrower and, because they don’t own any stake in the property being purchased, they generally assist out of compassion (i.e. a parent helping out an adult child).

Other points to note:

• Most lenders do not allow guarantor support unless the borrowers are purchasing a primary residence i.e. not for investment property purchase or where borrowers simply want to refinance and take cash out of their property

• Lenders will allow limited guarantee to be placed against the guarantor security, typically the guarantee amount cannot exceed a certain percentage of the guarantor’s property value.

• Family pledge, Family guarantee and guarantor are some of the common terms used by different lenders for the same product.

Things to consider

Guaranteeing a mortgage loan should never be taken lightly, it’s not a life sentence however the guarantors must consider all implications before agreeing to provide security guarantee. Ideally, once the primary borrower (s) has had a chance to become more financially stable and built equity in their property, all parties can consider refinancing the outstanding loan to remove the guarantor(s).

Keep in mind there may be fees involved with this. Your lender could also consider it breaking the mortgage if it’s fixed and done before maturity, in which case a penalty may apply. So make sure the terms are clear if your guarantor wants out early.