Agreeing to act as guarantor for someone is a significant responsibility, and one that should not be entered into without a thorough understanding of the implications and risks associated with signing on the dotted line.
Essentially, when a person is acting as guarantor, they have contractually agreed to pay the borrowers loan repayments (and ultimately, the entire debt) if the borrower defaults and fails to pay the loan repayments and/or the loan.
Depending on the guarantee documents, this can also include the guarantor having to pay interest and other costs in addition to the original loan repayments, and it can ultimately result in financial catastrophe and/or bankruptcy for the guarantor if the borrower defaults and fails to pay the loan repayments and/or the loan.
With increasing house prices and static wages, it is often difficult for younger adults to satisfy lenders requirements to enable them to borrow enough money to buy property, especially in areas where median house prices are sky rocketing, and a 10/20% deposit prior to purchasing a house is required.
In these circumstances, to cover themselves, lenders often require a guarantor prior to lending any funds and parents often help their adult children into the property market by agreeing to act as guarantor and use their existing assets (such as the family home) as security for their adult child’s home loan.
However, despite everyone’s good intentions, these types of situations can often go pear-shaped very quickly. For example, what will happen if the adult child loses their job or becomes medically incapacitated and cannot work? Or they separate from their husband/wife/de facto and the house forms part of the property pool and needs to be split? What about if the adult child’s business fails or they are sued and their property is used to pay damages?
All of these factors which should be taken into account prior to a guarantee being entered into and alternative options should be canvassed to ensure that the level of risk is minimised as much as possible, and is suitable for the parties in their particular circumstances. This can include a formal loan from the parents to the child to assist with coming up with a deposit if the parents are in a financial position to do so (which may in turn negate the lenders need for a guarantor), or their children could move back home ‘rent-free’ for a certain period to allow them to save for their house purchase.
Because of the serious nature of guarantees (and the high level of risk associated with them), it is a requirement that parties contemplating entering into a guarantee obtain independent legal advice. This means that you will need to attend on a lawyer, who will provide you with independent legal advice as to the nature of the guarantee, and the associated risks.
At Affinity Lawyers, our friendly and experienced lawyers can answer any queries you may have about the guarantee process or the associated risks, and can provide you with the independent legal advice required prior to entering into guarantee documents. Please telephone our Gold Coast office on 07 5563 8970 to arrange your appointment today.