Guarantor Advisory Declaration
The client is considering acting as a guarantor for a $420,000 loan that their partner is taking out over a 25-year period. Having prior experience as a guarantor, the client shares a mortgage with their partner. The collateral for the loan is their home, and the client has reviewed the guarantor agreement thoroughly, understanding the implications if their partner defaults. Although discussions about safeguards to limit liability have occurred, the client has not yet sought legal advice on the associated risks of being a guarantor.
Questions about this case
These answers have been verified by a lawyer in the LEAP networkWhat are the specific risks and obligations that I should be aware of as a guarantor for my partner's loan?
As a guarantor for your partner's loan, your main responsibility is to repay the loan if they default, which could lead to losing the collateral, your home. You are legally bound to the same terms as the primary borrower, meaning any adjustments to the loan agreement will also affect you. Additionally, being a guarantor may involve ongoing financial monitoring by the lender to ensure you can meet the obligation if necessary. It's essential to recognize that your liability does not end until the loan is fully repaid, regardless of any changes in your relationship with the borrower. For more detailed information, you can review the Australian Competition and Consumer Commission guidelines.
How does being a guarantor affect my financial position and credit rating?
Being a guarantor can significantly impact your financial situation and credit rating. If your partner defaults on the loan, you will be legally responsible for repaying it, which can stress your finances, particularly since your home is used as collateral. This obligation may influence your ability to secure new credit, as lenders might see the guarantee as a liability, reducing your borrowing capacity. While you may have no concerns about your credit rating currently, any failure to fulfill guarantor obligations can negatively affect your credit score and make future loans harder to secure. You should carefully consider managing your current mortgage alongside potential guarantee obligations.
What protections or safeguards can I implement to minimise my liability as a guarantor?
To minimize your liability as a guarantor, consider the following protections:
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Limited Guarantee: Negotiate with the lender to restrict your guarantee to a specific amount or to interest only, rather than the entire loan amount.
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Indemnity from Borrower: Obtain a written indemnity from your partner, ensuring they will cover any costs you incur if the lender enforces the guarantee.
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Seek Professional Advice: Consult a solicitor for tailored advice regarding your case and to ensure your rights are protected.
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Collateral Review: Since your home is collateral, ensure that the loan agreement does not facilitate an easier seizure of your asset.
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Co-Guarantor: If feasible, have another person co-sign to share the liability.
What happens if my partner defaults on the loan, and what are the legal consequences for me?
If your partner defaults on the loan, as a guarantor, you would be responsible for repaying the outstanding amount. The lender can pursue you for repayment, which may involve legal action for debt recovery. Since your home is collateral, the lender could initiate foreclosure actions to recover the owed funds. This situation can greatly affect your financial stability, especially considering your existing mortgage commitments. It's crucial to understand that your liability may extend to the full loan amount if your partner cannot fulfill their repayment duties.
Is there a way to revoke my status as a guarantor, and if so, what is the process?
Revoking your status as a guarantor can be complex, particularly after signing the agreement. Usually, you can only withdraw as a guarantor with the lender's consent or by refinancing the loan to remove your guarantee, often involving your partner securing an alternative guarantor. Understand that statutory rights in your state typically do not allow for automatic revocation. You should seek independent legal advice to explore possible options.
