With it becoming more and more difficult for young people to get onto the property ladder, it is now increasingly common to see transactions with parents guaranteeing the loan (or part of the loan) for their adult children as purchasers.
Banks typically require that the parents get independent legal advice about the nature of the guarantee they are entering into.
(By the way, this isn’t exactly something the banks do because they are worried about the welfare of the parents! It their defence against a long history of legal precedent, going back to the High Court case of Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447, where courts have held that guarantees of this type are void if the guarantor has not been given the independent legal advice.)
At Dott & Crossitt, we regularly provide legal advice to parents in this position.
We actually take the view that these guarantees are generally good things, where families are stepping in to do what the government is seemingly not able to do, to assist house price affordability.
Buy while it can be a generous and well-intentioned gesture from the parents, providing a personal guarantee is not a decision to be taken lightly. Below, we outline the key issues we raise with our parent clients when they come to us for independent legal advice on guarantees.
1. Understand What a Guarantee Really Means
A guarantee is a binding legal commitment that says: “If my child doesn’t pay, I will.” If the borrower defaults on the loan, the lender can pursue the guarantor for the debt. In many cases, this also includes any interest, fees, or enforcement costs.
Having said that, it is very common for guarantees to stipulate a maximum limit of the guarantee – and we will set this out in our advice.
In any case, enforcement of the guarantee can have serious financial consequences—especially when the guarantee is secured over the guarantor’s own home (which is usually what banks require).
2. The Three D’s: Death, Debt, and Divorce
When we speak to guarantors, we talk about the “3 D’s” as the major trigger events that often lead to guarantees being called upon:
- Death: If the borrower dies unexpectedly, repayments may stop, and the bank could call on the guarantee. We often recommend life insurance policies where the guarantor is nominated as beneficiary to help mitigate this risk. We also recommend (although we can’t require) that the parent be named in the borrower’s Will – if not as a beneficiary than at least as executor to ensure that the debts of the estate are paid in a timely manner.
- Debt: If the borrower experiences financial difficulty and falls behind on repayments, the bank may enforce the guarantee. Unfortunately, guarantors are often the last to know. Sometimes children hide the fact that they are struggling financially from their parents, due to shame etc. We suggest setting up regular financial check-ins (e.g. quarterly meetings) with the borrower to monitor how things are going.
- Divorce: Relationship breakdowns often lead to financial disputes. While the couple may be sorting things out in court, the bank doesn’t have to wait—they can come after the guarantor immediately, and the couples problem can become the parent guarantors. It is important to note that in most guarantor structures, parents will be required to guarantee their borrowings of all borrowers on the loan. That can often mean remaining the guarantor of an ex-spouse of your child for a period of time.
3. Your Property May Be at Risk
In many cases, especially where there’s not enough equity in the borrower’s property, the lender will require the guarantor to secure the guarantee against their own home. This means that if the borrower defaults, the bank can force the sale of the guarantor’s property to recover the loan.
We advise our clients to be very clear about this risk and to consider how it might affect their own future borrowing capacity, retirement plans, or ability to refinance.
4. You Have No Control, But All the Risk
One of the hardest things about being a guarantor is that you have very little control over how the borrower handles the loan. You don’t own the property, you don’t make the repayments, and you don’t get to participate in any financial upside—yet you may be on the hook if things go wrong.
We advise parent guarantors to have open and honest conversations with their children about expectations, risk management, and the consequences of default.
Probably the most important bit of advice we can give is that there needs to be some kind of plan, either informal or ideally formal, between the parents and the guarantors as to WHEN and HOW the borrowers will refinance their mortgage to release the guarantee after there is sufficient equity in place. This plan should be revisited every quarter or so by all parties to monitor progress. A guarantee which is forgotten about will never get released.
Final Thoughts
Being a guarantor is a generous act—but it comes with real legal and financial risk. Before you agree, take the time to understand what you’re getting into, speak with a solicitor, and make sure you’ve considered all the “what ifs.”
If you’ve been asked to obtain independent legal advice for a guarantee you are giving or if you one of your clients requires an introduction to a solicitor to obtain this advice, you can make a booking on this Calendly link.
Dott & Crossitt Solicitors
Property and Guarantee Law Experts
