A young man had worked hard to save for a deposit for his first home.  Although he had a good deposit, his bank was still concerned about his ability to repay the loan.  He therefore approached both his parents and grandparents to see if either of them would be willing to guarantee his bank loan. 

When deciding whether to guarantee someone else’s loan (sometimes called ‘going guarantor’) it is a matter of striking a balance between assisting your children or grandchildren while protecting your hard-earned assets.

What is a guarantor?

Being a guarantor is when you confirm in writing that you will be liable for paying the borrower’s debt if they are unable to.

A guarantee must be in writing and signed by the parties to be enforceable.

Why do banks require a guarantor?

Lenders/banks generally request guarantees when they want certainty that the debt will be repaid if the borrower is unable to do so. As well as giving a personal guarantee, you (as a guarantor) may be asked to provide an indemnity to the lender which says that you will be liable for all costs or losses associated with recovering the debt if the guarantee is called upon.

Often guarantees are used when non-individuals are borrowing – like companies or trusts, in which case the directors or trustees are required to personally guarantee the loan. 

Equally they are used for individuals borrowing when a bank is not satisfied that the borrower on their own has enough security or income to meet their risk criteria.

What should I consider if my children or grandchildren have asked me to be a guarantor for them?

Signing a guarantee is risky, as it means you stand in the shoes of the borrower, so you’re placing your own assets at risk by doing so.  Essentially if the borrower doesn’t pay back their loan when required, you may have to sell your own home or assets to repay it for them.

Here are some important things to consider when deciding if you will agree to be a guarantor:

• The value of the guarantee;
• What else the guarantor may be liable for;
• Whether the guarantee amount is for a fixed sum or unlimited (in other words, is the amount fixed or could it increase in future if they borrow more?);
• Any security the lender may take (for example a mortgage over your own home);
• The length of the guarantee, if applicable; and
• How the guarantee can be cancelled.

You are entitled to obtain independent legal advice as a guarantor (separate from the advisor for the borrower) and it is strongly recommended that you do so.  The guarantor must confirm that they understand the full extent of what they are agreeing to before signing.

Where possible the guarantor should seek to have the guarantee limited to the original sum guaranteed.

What happens if the guarantee I signed is being enforced?

If the borrower has defaulted and the guarantee is being enforced, the bank will notify you and the borrower that they require repayment of outstanding sums, usually by a certain date. 

A surprising aspect of enforcing guarantees is that the lender does not have to go after the borrower (i.e. your children or grandchildren) first for repayment of the debt – they can go straight to you as guarantor. This is the case even though the bank will generally have a mortgage over the borrower’s house. 

There is no requirement for the bank to try to sell that house at mortgagee sale first before coming after the guarantor.  The bank can choose which path they take, and they may take more than one path if what is owed ends up being more than the value of the borrower’s home they hold as security.

The lender/bank will require repayment of everything that is owing, and any other costs that you would have agreed to in writing in the guarantee – which may include the lender’s legal fees and debt collection costs.

If you are unable to meet your obligations as guarantor, this can have very serious consequences for you. It may result in having to sell your assets, or ultimately may mean bankruptcy if you are unable to repay the debt.

Other options to going guarantor

There may be other options to consider such as providing a gift or loan to the child or grandchild instead.  If the lender will not agree to limit the proposed guarantee to a set amount, this is a good option if you have cash available.

If you are looking to provide a guarantee, or have provided one but have concerns about the extent of your obligations, you should always seek independent legal advice.