A limited guarantee is a type of security guarantee where the guarantor’s liability is limited to only part of the home loan. As with a normal guarantor home loan the guarantor will have a mortgage or second mortgage on their home from the lender as additional security for the borrowers loan. The difference is that the guarantor is not liable for the entire loan amount.

Example

For example if John purchased a home for $500,000 and wanted to borrow 100% of the purchase price then instead of John’s parents guaranteeing the full $500,000 loan we could arrange the loan so that they were only liable for part of it.

The first method of setting this up would be to have two separate loan accounts. One for $400,000 (secured on John’s property) and the second for $100,000 (secured by John’s property and the guarantor’s property). This means that the guarantor’s liability is limited to $100,000 + interest fees and charges.

The second method is for the lender to arrange a single loan account of $500,000 with a clause in the contract that outlines that they could only pursue the guarantors for a maximum of 25% of the loan amount, in this case $125,000. In practice, the guarantor would have the same liability as the first method, except that it is structured in a different way.

Benefits of a limited guarantee

By limiting the guarantee the position of the guarantors is greatly improved. In the event that anything was to go wrong then they would be able to make payments on their portion of the debt to keep the lender satisfied.

A little known benefit of the limited guarantee is that the guarantors borrowing capacity is not reduced as significantly, in the event that they choose to obtain a loan in their name to buy an investment property or for some other purpose. This is because lenders will assume the guarantee will be called upon when assessing if the guarantor can afford any new loans of their own.

How to limit the guarantee?

Enquire online and one of our mortgage brokers will contact you to discuss the best way to structure your guarantor loan to limit the guarantor’s liability.