Anyone wishing to purchase residential property with the help of a mortgage is generally advised by the bank to contribute a certain amount of equity. Under certain conditions, however, property financing can also be secured by means of a guarantee. In such cases, there are several important points to consider.
Younger people in particular have often not yet had the opportunity to build up sufficient savings to purchase a property. However, many banks require buyers to contribute around 20 percent of the purchase price as equity when applying for a mortgage. In these cases, a guarantee may offer an alternative. A third party declares to the bank that they will assume liability if the borrower is no longer able to meet their payment obligations.
Different Types of Guarantees
From a legal perspective, the borrower, meaning the purchaser of the property, enters into a separate agreement with the third party. This agreement specifies the circumstances under which the guarantor becomes liable. Banks generally impose strict requirements on guarantees used for property financing. Such a guarantee may not be limited in time and does not expire simply because the principal claim has been repaid. The guarantor is therefore liable with all of their assets until the loan amount, as well as all interest and fees, has been paid in full.
Several types of guarantees are commonly used. They differ primarily in terms of the guarantor’s repayment obligations. A deficiency guarantee is considered the safest option for the guarantor. Under this arrangement, the guarantor is only required to repay the debt once the bank has exhausted all available means of recovering the money from the borrower.
By contrast, under an absolute guarantee, the bank may enforce its claims against the guarantor without first having to pursue the borrower. In such a case, the guarantor must make the payments until the borrower is able to resume them.
Consumer protection organisations warn potential guarantors about a third form: an absolute guarantee involving a waiver of legal defences. Under this arrangement, the guarantor even waives the right to object to liability on the grounds that the claim may already be time-barred.
Prospective buyers and guarantors should therefore obtain detailed information about the applicable conditions at an early stage. In all cases, a guarantee should only be considered if both parties are independently able to make the required loan repayments on a regular basis.
