Taking out a loan is a very large and important financial commitment, and so is guaranteeing a loan for someone else. There can be significant financial ramifications for people who guarantee a loan for someone else, so it is of vital importance that you fully understand what you're agreeing to before becoming a guarantor.
What is a property guarantee?
A property guarantee is something that a bank might ask for when someone (the "borrower") wants to get a loan, usually a mortgage. If you don't have enough income or cash funds for the bank to be satisfied that you can maintain the loan on your own, they may ask that you get someone else to guarantee the loan.
This means that if the you fail to make a payment or become entirely unable repay the loan, the person who agreed to guarantee for you (the "guarantor") will become responsible for it. The bank can then chase the guarantor for any outstanding amounts on the loan.
Who guarantees a loan?
In most cases, the guarantor is a family member of the borrower and the type of loan is either a mortgage or a business loan. This can be a very risky situation because the guarantor might agree to guarantee the loan out of familial obligation rather than doing what is in their best interests financially.
The reality is, people default on their loans sometimes, and nobody plans on that happening. So no matter how much a person thinks that it won't happen to them, it is still a very real possibility. So it's extremely important that the guarantor knows exactly what they are getting themselves into.
Understanding the risks
Before agreeing to guarantee a loan, make sure you fully understand all the risks involved. There are a number of details that you may not have considered that can be very important to the outcome of a property guarantee.
Some questions that you need to ask are:
- What happens if they default on the loan? If the borrower defaults on it, you will become responsible for it as the guarantor. The bank can require you to pay the borrower's outstanding debts. Depending on the size of the loan, this could be a very large sum. Consider whether you would be in a position to take on the loan yourself if the borrower defaults.
- Is your property being used as collateral? If your property is being used as collateral for the loan and the borrower defaults, you might find yourself in a situation where the bank or lender has the ability to sell your property to recover the outstanding amount.
- Will you be liable for an increased loan amount? With some banks, you only guarantee the initial loan amount. But in some cases, the borrower may be able to increase the amount that they have borrowed without your consent or notification, and you would be liable for the increased amount.
These are just a few of the potential issues that you could have as a guarantor, so it's imperative that you fully understand all the legal and financial responsibilities and potential repercussions of being a guarantor.
Get expert legal advice before signing a property guarantee
Generally speaking, most banks will require you to get independent legal advice before you become a guarantor for a loan. A lawyer must sign and provide you with a certificate that confirms that you have received legal advice before they will accept you as a guarantor.
Seeking legal advice will allow you to to get answers to all of your questions. Make sure that you know all the possible outcomes of guaranteeing a loan so that you can make an informed decision.
Talk to Rose Lawyers
At Rose Lawyers, we have been advising our clients on the legal risks of all kinds of contracts for over 35 years. We can help you to understand all the potential risks of guaranteeing a loan. You'll get real advice about your options so that if you do decide to be a guarantor, you'll be prepared for any eventuality.
Find out everything you need to know about property guarantees, call Rose Lawyers on 03 9878 5222.