A guarantor is someone who provides a guarantee to a lender to allow a debtor to borrow money. For example, if your child wants to purchase a house, but they don’t have enough of a deposit, you can provide a guarantee so they may borrow. If your child defaults on their loan, sure enough, the lender will come to you for money. Usually, the lender will take a mortgage out on your property to ensure there is security for the loan, which in some circumstances the lender will make you guarantee your income, personal assets, and other investments.
It is important to discuss with your child or the person you are becoming a guarantor questions such as:
- Will you be able to service this debt?
- Do you know my liability under this agreement?
- Do you understand your liability under this agreement?
- Have you sought your own advice? Whether it be legal or financial.
- Should I be worried?
- Have you made a will and ensured all your affairs are dealt with?
The three rules of becoming a Guarantor I suggest are:
- If someone asks you to be a Guarantor, say NO!
- If someone pleads with you and begs you to be a Guarantor, say NO!
- And if you change your mind and think that you may want to be a Guarantor, and think about it reasonably, the answer should still be NO!
This may instill fear and worry about the role, but there are plus sides to being a guarantor. For example, with rising house prices and demand for property, it is becoming ever so hard to enter the housing market, allowing yourself to be a guarantor allows the next generation to enter this market, whilst enabling you not to make any initial financial outlay.
The laws in Australia have changed since the Amardio case mentioned below, there are numerous information sheets, contracts, loan documents, and certificates that must be signed prior to becoming a Guarantor, and you must seek independent legal advice. This is all to ensure that the Guarantor knows exactly what they are getting themselves into.
The case below was an early case where the Lender did not disclose to the Guarantors what they were getting themselves into and in turn backfired on themselves, when the loan defaulted, the bank could not rely on the Guarantee provided by the Parents of the defaulting party.
Commercial Bank of Australia Ltd v Amadio [1983] HCA 14; (1983) 151 CLR 447
Giovani and Cesira Amadio son, Vincenzo, had a business as a builder, they mistakenly guaranteed their son’s indebtedness to the Commercial Bank of Australia, they executed documents with the bank which allowed a mortgage over a building which they owned.
Sure enough the sons business failed and the bank sought their guarantee. The case the Amadio family were enforcing was that the guarantee was unconscionable.
The Amadios appealed the initial decision to the Full Court of the Supreme Court. The court held that the bank knew the son’s financial position was in dire straits, the bank had collaborated with the son to conceal his failing business from his creditors and the bank had an obvious interest to obtain better security for the repayment of the money it had already lent.
The Full Court held that the silence from the bank in these circumstances meant the transaction was unconscionable and it was set aside.
After this case, the laws around becoming a guarantor changed and ensured that disclosure was very clear when executing documents. If the Amardio’s had the initial disclosure which is in place today and all the right steps had been taken by the lender, the Amardio parents could have lost everything.
RN LEGAL has assisted many clients with Guarantor Queries and Concerns. RN LEGAL has the experience, expertise, and resources to help you with such matters. Contact RN LEGAL on (02) 9191 9293 or [email protected] if you, or someone you know, requires advice or assistance in relation to any aspect of becoming a Guarantor.