What is guarantee lending?
Guarantee lending allows a third party (guarantor) to support a borrower’s loan using either their property, income, or both.
There are two types of guarantors:
Security guarantor
Servicing guarantor
Understanding the difference is critical, as each has different compliance obligations under the National Consumer Credit Protection (NCCP) Act.
What is a security guarantor?
A security guarantor uses equity in their residential property as security for part of a borrower’s loan.
They are commonly a close family member, such as a parent or sibling, though some lenders may allow extended family.
The guarantor:
Does not provide cash for the deposit
Nominates a limited guarantee amount
Is only liable for the guaranteed portion if the loan defaults
This structure can help borrowers:
Purchase with a smaller deposit
Reduce or avoid lenders mortgage insurance (LMI)
How a security guarantor structure works
Example:
A borrower purchases a $500,000 property with a $50,000 deposit (10%).
To avoid LMI, a guarantor provides $50,000 equity from their property. This creates a combined 20% security position.
The borrower can proceed without paying LMI, subject to lender approval.
NCCP obligations for security guarantors
Security guarantors are not considered borrowers under NCCP responsible lending obligations. However, you must still follow best-practice conduct.
You must clearly explain the guarantor’s limited liability and ensure they understand the risks before proceeding.
What you need to do
Provide the guarantor with your Credit Guide
Recommend independent legal and financial advice in writing
Ensure the guarantor understands their obligations under the loan
Many lenders require written confirmation that independent advice has been obtained.
What is a servicing guarantor?
A servicing guarantor supports a loan using their income to help meet serviceability requirements. They are typically a close family member.
The lender may:
Include the guarantor’s income in servicing calculations
Use their property as additional security (in some cases)
NCCP obligations for servicing guarantors
Servicing guarantors are treated as loan applicants under NCCP.
This means full responsible lending obligations apply.
You must treat servicing guarantors the same as borrowers for compliance purposes.
What you need to do
Complete full NCCP documentation
Conduct suitability and affordability assessments
Collect personal and financial information
Provide all required disclosure documents
Submitting guarantor applications in Apply Online
Some lenders require multiple applications when a guarantor is involved.
When multiple applications are required
Example:
One application for the borrower’s loan (e.g. 80%)
One application for the guaranteed portion (e.g. 20%)
What you need to do
Create a separate Mercury Opportunity for each application
Clearly link both opportunities
Retain all notes and communication in the primary Opportunity
Always confirm lender-specific requirements before submission.
Managing communication and conduct
You are responsible for ensuring clear, transparent communication with all parties.
Best-practice approach
Conduct initial meetings with all applicants and guarantors
Hold at least one separate discussion with guarantors
Communicate directly with guarantors at all stages
Do not rely on borrowers to relay information
You must ensure guarantors are not pressured by borrowers at any stage.
Ongoing communication
Include all parties in key updates
Document all discussions and decisions
Confirm key points in writing after meetings
Encouraging independent advice
Guarantors must understand the legal and financial risks of entering a guarantee.
Always recommend independent legal and financial advice before signing any documents. This is typically a lender requirement and supports your compliance obligations.
What happens next
After submission:
The lender will assess both borrower and guarantor positions
Additional documents may be requested
Independent legal advice confirmation may be required before approval
Need help?
If you need help with compliance requirements or guarantor scenarios, contact your Partnership Manager or email [email protected].