Independent Advice. Know Your Obligations

We regularly provide tailored personal advice to individuals who choose to give personal guarantees in favour of other individuals (such as family members or friends), companies, trusts, or self-managed superannuation funds. You become a guarantor when you ‘guarantee’ a loan for somebody else.

A personal guarantee is a contractual promise to a financial institution or other lender that the guarantor will honour the obligations imposed under a loan agreement or mortgage if a borrower fails to keep their financial promises.

What will happen if the borrower is unable to repay the loan?

Once you become a guarantor, you are responsible for paying back the loan if the borrower fails to do so. If you are a guarantor and the borrower is unable to repay the loan, the lender can take legal action against you. You will be liable for the amount specified in the guarantee (whether limited or unlimited) and possibly for all costs associated with the lender enforcing the guarantee.

As guarantor you may not necessarily be entitled to notice of the borrower’s default and the first notification you receive may be when the lender has made a call against you as the guarantor to cover the borrower’s debt.

Guarantors for a mortgage

A guarantor for a mortgage allows the equity in their own property to be used as additional security for the borrower. In many of these scenarios, the guarantor is a close relative such as a parent, grandparent, or sibling. If the borrower is unable to make any repayments on the mortgage and defaults, the guarantor becomes responsible for making these payments.

Limited vs unlimited guarantees

A guarantee can be limited, which means the guarantor’s liability extends to a fixed amount or portion of the mortgage, or unlimited, meaning the guarantor will be liable for the entire mortgage. The guarantee documents will specify whether the guarantee is limited or not.

Can you have more than one or two guarantors?

There can be multiple, two or more guarantors to a mortgage, which means that the guarantee is to be provided jointly and severally. In this scenario, the lender can take action against all the guarantors jointly or severally (i.e., only one guarantor). ‘Severally’ simply means that each guarantor is potentially liable for the entire mortgage amount of the guarantee.

What if I want to sell a property I’ve guaranteed as security?

Generally, you will not be able to sell your guaranteed property without the guaranteed loan being paid either in part or full or providing a form of substitute security for the lender.

Some banks may allow you to pay down the guarantee with the profits of your sale. For example, if you guaranteed a certain percentage of the loan, you could pay that amount in cash to the bank and in exchange, the bank would release your guarantee and discharge their mortgage over your guaranteed property upon settlement.

The bank may also agree to hold a sum of money from the sale of your property as replacement for the security in a term deposit account in your name.

If you are selling your home and purchasing a new one at the same time, the bank may allow you to transfer the guarantee over to your new property. Keep in mind, you will most likely be required to complete a new Guarantor Advice Certificate.

Independent Guarantor Advice Certificates

The purpose of a Guarantor Advice Certificate (GAC) proves to a lender that their customer has obtained independent legal advice and fully understands the legal nature of what they are signing. GACs were introduced in response to cases where loans or guarantees had been set aside because the borrowers or guarantors were found to have not understood what they were signing.

As guarantors usually receive nothing in exchange for exposing themselves to financial risk, financial institutions usually require that they first obtain independent legal advice before signing any guarantee documents.

Common situations where a GAC and independent legal advice is needed include:

  • parents providing a ‘family pledge’ guarantee for a child’s home loan
  • loans to family trusts
  • loans to companies
  • loans to self-managed superannuation funds

It is extremely important to seek independent legal advice whenever you provide a guarantee for any third party, even if you believe the third party will fulfil their repayment obligations.

Matti Lamb & Associates can provide Guarantee Advice Certificates for a fixed fee depending on each bank’s expectations and requirements. Our flexible service means that advice can be provided in person at our office, or via video link.

If you need assistance, contact one of our lawyers at [email protected] or call 08 8155 5322 for expert legal advice.

Our team is here to help you every step of the way.
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