9 Nov 2017Going guarantor on someone else’s loan or debt is a serious commitment which should not be taken lightly.
What is a guarantee?
A guarantee is an assurance or promise. A person who guarantees a loan agreement is known as a guarantor.
The guarantor provides a security over an asset, such as a mortgage over property, to guarantee the agreement between the lender and the borrower. A guarantor assumes the responsibility of any debt to a lender in the event of default by the borrower.
Who will go guarantor?
Guarantors can be parents assisting children with a home loan in residential transactions. Alternatively, a spouse or de facto partner may be required to guarantee a debt in certain commercial circumstances.
Beneficiaries of a family trust or self-managed super fund are also required to sign as guarantor.
When is independent legal advice required?
Banks and other financial institutions may require a guarantor to receive independent legal advice. The purpose of independent legal advice is to explain the potential ramifications of a guarantor entering into a binding and enforceable agreement.
In NSW, evidence of the advice provided by a solicitor must be in the form of:
- Schedule 2: Declaration by Third Party Mortgagor, Guarantor, Surety Mortgagor or Indemnifier for the Borrower/Grantor of a Security Interest
- Schedule 2A: Declaration by Third Party Mortgagor, Guarantor, Surety Mortgagor or Indemnifier for the Borrower/Grantor of a Security Interest (Corporation)
Guarantor responsibility in the event of default by the borrower
If the borrower defaults under the loan agreement, the guarantor will be liable to remedy that failure. The guarantor will be required to pay the amount owed by the borrower, interest, default interest and a multitude of other charges, such as the cost of maintaining the property until sale and legal fees.
If the guarantor fails to remedy the default of the borrower of the loan, the lender can sell the secured asset to recover the amount owing. In addition, the lender can sue the guarantor personally for any deficit.
What is the liability of a guarantor?
The liability of a guarantor depends on what is contained within the terms and conditions of the agreement. A guarantor’s liability may be limited to a specific sum.
However, a document may specify that a guarantor’s liability be increased and also restrict or limit a guarantor’s rights or obligations in relation to the security.
Taking on financial risk without reward
Going guarantor is a serious commitment. Generally a guarantor assumes financial risk without reward.
Be aware that the lender can exercise its rights against the guarantor even if it has not pursued the borrower.
Do you need to get independent legal advice?
Independent legal advice for a guarantor serves a number of purposes. It assures a bank or financial institution that the guarantor understands their legal obligations and also helps protect the guarantor from unconscionable dealings.
Banks and financial institutions may insist on a guarantor receiving independent legal advice in an attempt to prevent unconscionable dealings.
If you are considering being the guarantor of someone’s loan, it is pertinent for you to get independent legal advice before you sign any document.
For more information please see Trouble at the bank of mum and dad – the horror story edition on family loans.
