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Financial Dictionary - Guarantee


Broadly speaking, a guarantee ensures that an obligation is fulfilled. It is classed as financial (for example, in the case of a sum of money) or personal (if the third party fulfils the obligation with their assets).

In the case of a mortgage guarantee, it guarantees payment of the loan, acting as back-up if there is a breach of the mortgage agreement (i.e. default on the monthly instalments).

It is regulated by the Mortgage Act and also the Civil Code, which defines the guarantor (or surety) as the person who will take responsibility for the debt incurred by a third party (i.e. the obligor, borrower or debtor) if this latter party defaults on payment. In such cases, the guarantor uses their own credit or assets to fulfil the obligation undertaken.

The guarantee is usually unilateral, meaning that it is only the guarantor who incurs a debt in favour of the creditor. However, it can also be bilateral, in which case the creditor has certain obligations if the guarantor is unable to settle the debt incurred.

There may be more than one guarantor, in which case the persons involved act as co-guarantors and are only responsible for part of the debt, unless joint and several liability is stipulated.

The guarantee must be expressly specified in an agreement governing the relationship between creditor, guarantor and obligor, as well as the type of responsibility assumed by each party. The responsibility will be subsidiary if the guarantor only incurs the debt in case of default by the debtor due to total or partial insolvency, and it will be joint if the obligation regarding the debt is joint. In this case, the debtor does not need to declare insolvency and the creditor may undertake recovery actions against either the debtor or guarantor without distinction.

Is the guarantee taxable?

The taxation of the guarantee depends on whether it was established at the same time as the mortgage or not. If it was, it will be subject to stamp duty but it will not be taxable under the unit taxation rule applied to the mortgage. In other words, it will only be taxed as a mortgage, not as a guarantee as well. However, if the guarantee and the mortgage were not established at the same time, 1% of the guarantee will be added to the stamp duty payable for the mortgage, although this may vary from one region of Spain to another. The bank is liable for this tax, although an agreement is usually reached with the customer to split the payment.