Kelvin and Tim were co-directors of a company which bought a rental property.  They went to the bank to organise a mortgage to buy the property and didn’t pay much attention to what was being said by their banker and agreed to be guarantors of the loan to the company.

When they signed the documents with their lawyer, the lawyer explained to them that they were each signing unlimited “all obligations” guarantees which meant that their individual assets were up for grabs by the bank if the company defaulted on the loan or any future loans the company took out.  They understood, but thought it would never happen to them.

As it turned out, rent received was not enough to cover mortgage payments and after a period of continued default, the bank enforced its guarantees.  The bank came after both the directors personally and both were forced to re-mortgage their own properties to repay the company loan.

It is crucially important to make sure you understand the structure of your loans before you agree to go ahead with purchasing a property, especially if there are guarantees involved.  Talk to your bank about options for structuring your borrowings.  If you are unsure, talk to your lawyer about what the best structures are to give you as much protection as possible.