Guarantor’s Obligations And Rights

A guarantor loan is great for borrowers that wish to purchase a property with no deposit.

However, this arrangement imposes quite a large obligation on the guarantor to repay the borrowers debt in the event of default.

If you are thinking about becoming a guarantor and want to find out more about your rights and duties under this arrangement, please read on.

Note that it is always advisable to speak to a legal professional.

They can give you full and proper advice that is relevant to your circumstances.

Why do the banks need a guarantee?

If a borrower does not have adequate funds to service the loan, their borrowing capacity will be restricted to a lower percentage of the property’s value.

This means that most first home buyers will not be able to purchase a house without the help of a gift or a guarantee from a family member.

With a guarantor loan, parties can borrow 100% of the purchase price, as the loan amount is guaranteed to be repaid by the guarantor, in the event that the borrower defaults.

Guarantor’s obligations

As guarantor of a loan, you will be required to sign a written agreement that you can provide any funds where the other party fails to pay their loan.

Apart from the formal requirements, this means that you will become answerable to any defaults of the borrower.

Why may the borrower default?

There are a variety of reasons why people default on their loan. Some people cannot budget effectively to meet their repayments. Others get injured or sick, resulting in a loss of income.

When this occurs, they may encounter difficulty in abiding by their contractual agreement to repay their debt.

As such, the guarantor will be required to cover any loss that the bank incurs if they are forced to sell the borrowers property and there is still a shortfall.

Due to the nature of this arrangement, you must be sure that the borrower will be able to pay off their debt, before you guarantee their loan.

This way, you can limit your exposure to risk. For more information or to apply for a guarantor loan, please contact us on 1300 399 056 or enquire online today.

How are guarantee’s enforced?

Having signed a guarantee, you are bound by the legal document and the bank can call upon the guarantee if the borrower fails to honour their obligations under the loan agreement.

There are relatively few circumstances in which the guarantee would be unenforceable, as against the guarantors.

This is generally where there have been some vitiating factors in the formation of the contract which void the agreement.

Voiding the agreement

Where there is pressure exerted on the guarantors, undue influence, duress or misrepresentation, the agreement may become void.

This means that the guarantor contract will be terminated.

Most of the time, these cases involve elderly parents with language difficulties who have little understanding of the agreement they are entering into.

However, it must be noted that elements of these factors are difficult to make out.

Therefore, most banks will not be barred from recovering the funds from the guarantor.

Additionally, most lenders will require confirmation that the guarantors have sought independent legal advice about the guarantor arrangement.

Important information for guarantors

Although a guarantee provides great benefits to first home buyers, it is also quite risky for the guarantor.

This is why it is important that guarantors fully understand their obligations, as well as whether the guarantee is limited or unlimited in both amount and duration.

Consider whose loan you are guaranteeing. Do you think that they will be able to manage their debt? Are they financially responsible?

These are the important questions you must ask when agreeing to guarantee a loan for a family member.

Get independent legal and financial advice

The importance of expert advice cannot be understated when it comes to guarantees.

Please speak to your legal professional and accountant and they can help you decide whether you are appropriately placed to become a guarantor.

For help with arranging guarantor finance, please call us on 1300 399 056 or enquire online and we can help you get approved with great rates. Speak to us today!