Guarantor Structure for a Borrower with a Disability Pension
Daniel, 34, receives a disability support pension of $28,600 per year plus $9,600 from part-time work. He wants to buy a unit for $395,000 with a $40,000 deposit. His sister, Wei, 39, earns $142,000 and owns her home with $310,000 owing on a mortgage; she is willing to act as guarantor, limited to $80,000, secured by a second mortgage over her property. Daniel's credit file is clean but he has no savings history beyond the deposit, which came from an inheritance 11 months ago. The loan required is $355,000, or 90% of the purchase price.
1. Evaluate whether this structure is workable and identify the policy obstacles.
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Serviceability. Daniel's income is $38,200 gross. Centrelink payments are accepted by many lenders but usually at 100% of the documented rate, and some lenders exclude them. Net income is roughly $35,000. A $355,000 loan at an assessment rate near 9% over 30 years costs about $2,850/month, or $34,200 a year. After tax and the loan repayment there is almost nothing left for living costs. On his own income the loan is not serviceable.
Guarantor support. A limited guarantee of $80,000 reduces the lender's exposure but does not usually change the serviceability test, which is applied to the borrower. Some lenders will accept a guarantor's income in a joint assessment only if the guarantor is a co-borrower; a guarantee alone typically does not add servicing. Wei should understand that a guarantee exposes her home to a second mortgage and that she may be called on if Daniel defaults.
Deposit. 90% LVR with a gifted or inherited deposit: lenders want genuine savings. An inheritance received 11 months ago is generally acceptable as genuine savings if held or traceable for three months, so this is likely fine, but LMI will apply at 90% and some LMI providers restrict disability pension income.
Conclusion. The structure is unlikely to be approved as proposed. Options: reduce the loan by increasing the deposit, have Wei co-borrow (with clear advice about her exposure), or buy at a lower price. Wei must receive independent legal advice before signing the guarantee.
2. What must you tell Wei before she signs, and how does this differ from advice to Daniel?
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Wei is a third party to the loan and needs to understand the full extent of her exposure: the guarantee is limited to $80,000 plus enforcement costs, but a second mortgage over her home means the lender can pursue that property if Daniel defaults. She should know that her own borrowing capacity is affected while the guarantee is in place, that the guarantee may not be released if Daniel refinances elsewhere, and that relationship breakdowns are a common trigger for guarantor disputes.
You must recommend that Wei obtain independent legal and financial advice before signing, and the lender will require a certificate of independent advice. You should not act for both parties in a way that creates a conflict; your client is Daniel, and Wei's interests may diverge from his. Be clear about who you act for.
For Daniel, the advice covers affordability, the risk that the loan is unaffordable on his income alone, the implications of default for both him and his sister, and the alternatives. Explain that a guarantee does not fix serviceability and that the lender will still assess him. Document both conversations, including that Wei was advised to seek independent advice.