To guarantee a loan or to not guarantee, that is the question

To guarantee a loan or to not guarantee, that is the question…

Many people saving for their first home manage to scrape together a deposit and still find that is not enough to get the loan approval they need to purchase the property they want. They may be employed full time and have no reason to believe that they would not be able to make the necessary  repayments if they could just get approved for the loan. People in this position often approach a member to act as a guarantor for their loan using the equity they have in their own home, and many family members are happy to offer this assistance to first home buyers to get them into the property market. Unfortunately, family members often agree to act as a guarantor without getting legal advice first, and without fully appreciating the potential consequences.

There are plenty of things that can go wrong that guarantors often do not consider. Guarantees usually do not come with a time frame for release and guarantors may need to take out a loan in future – if their property is used as security for a guarantee, they may not be able to, or at least not without the lender’s approval. Many guarantors also do not consider the possibility that there may be a relationship breakdown between the property purchasers before the loan is paid out. But an even bigger consideration should always be, what if the borrower cannot make their mortgage repayments? If the covid-19 situation has taught us anything it is that no job is 100% guaranteed. A borrower could lose their job at any time through injury, disability, or other circumstances and no longer have the ability make their loan repayments. What are the potential consequences for the guarantor?

Despite popular belief, if the borrower defaults on a loan repayment, the bank is not required to pursue the borrower for the repayment and may not want to waste their time doing so if a borrower is a person of limited financial means. Guarantors are usually required to grant a mortgage over their own property as security for the guarantee and could find themselves in the situation where a bank may be able to take possession of, and sell their property, to recover the amount owed by the borrower including interest and other costs such as solicitors fees and the costs of selling the property. If the sale of the property is not sufficient to meet the full amount owed, the bank could pursue the guarantor personally for any other assets they may have that could satisfy the loan amount. While the borrower may have the right to claim financial hardship and negotiate with the bank in relation to a default situation, often the guarantor’s rights are less clear.

Most banks and mortgage brokers now require proposed guarantors to obtain independent legal advice so that they are fully aware of the potential risks involved before signing a guarantee. At WNB Legal Pty Ltd we will offer you straightforward advice and assist with completing loan and guarantee documents for a fixed fee, contact 0419 464 946 to book a consultation with KC Hilton, Solicitor.