Being asked to guarantee a loan usually comes from someone you care about: a child buying a first home, a partner starting a business, a friend who cannot get approved on their own. It is hard to say no, and it often feels like a formality. It is not. A guarantee is a legal promise to repay someone else’s debt if they cannot, and in some cases the lender can look to your own home to recover it.
This checklist sets out what to ask, and what to have checked, before you sign. It is written for people across the Hunter Valley who have been asked to be a guarantor, whether for a home loan, a business loan, a commercial lease or a car loan. It sits alongside our guarantor documents page, which explains how we review guarantees and act for guarantors.
At Hills Solicitors we have acted for Hunter Valley families and business owners since 1894, and the questions below are the ones guarantors most often wish they had asked sooner.
Why Guarantees Are Riskier Than They Look
A guarantor is a person who promises a lender that they will repay the borrower’s debt if the borrower cannot. Lenders usually ask for one when they want extra security. Three things catch people out:
- You can be asked to repay all of it. If the borrower defaults, the lender can look to you for the outstanding balance, interest, fees and enforcement costs, not only the missed repayments.
- Your home may be on the line. If you offered your property as security, the lender may be able to sell it to recover the debt.
- You do not receive the loan. You carry the risk without the benefit, and you may be asked to pay at a time when the borrower, and often the relationship, is already in trouble.
ASIC’s MoneySmart website makes the same point in its guide to going guarantor on a loan, and suggests treating a guarantee as though you were taking out the loan yourself. That is a useful test to apply to every item below.
Your Checklist Before You Sign
1. Do you know exactly what is being borrowed, and why?
Ask the lender for the loan contract early, not on the day of signing. Check the amount, the purpose, the term and whether the interest rate is fixed or variable. A guarantee of a home loan, a car loan and a business loan carry different risks, and you should know which one you are looking at. If the borrower cannot or will not show you the documents, treat that as a warning sign.
2. Is the guarantee limited or unlimited?
This is one of the most important questions, and the answer is in the document, not in what anyone tells you. A limited guarantee caps what you can be asked to pay at a stated amount, which is sometimes used to cover part of a home buyer’s deposit. An unlimited guarantee, often called an all moneys guarantee, can cover everything the borrower owes the lender, now and in the future, plus interest, fees and enforcement costs. If the guarantee is unlimited, ask whether it can be limited before you sign, and ask the lender to confirm in writing the maximum you could owe.
3. Is your property being used as security?
Some guarantees are backed by a mortgage over your own property, often called third party security. The mortgage is usually registered against your title, and if the debt is not repaid the lender may be able to sell the property. Find out which property is involved, whether your existing lender needs to agree, and whether the security covers only this loan or other debts the borrower may take on later.
4. What happens if the loan changes?
A lender cannot change the amount or terms of the loan unless the original loan documents explicitly allow it or the change is agreed in writing during the term of the loan. That makes the original documents important, because anything they explicitly allow does not need a fresh agreement. Read what the loan and the guarantee say about changes, and ask whether you will be told when they happen.
5. Could you afford to pay if the borrower could not?
Add up what you might owe: the loan balance, interest, fees and charges. Then work out how you would pay it if the lender called on you, thinking about your savings, your income, your own mortgage and your plans for retirement. A guarantee can also affect your own borrowing. MoneySmart notes that you should tell a lender about any loans you guarantee when you apply for credit, and that they may decide not to lend to you even if the borrower keeps up repayments.
6. How secure is the borrower’s position?
A guarantee is only as safe as the borrower’s ability to repay. Ask about their income, their other debts and what happens if their circumstances change, for example if they lose a job, a business slows down or a relationship ends. For a business loan, ask to see the business plan, recent financial statements and cashflow forecasts, because business income can change quickly. If the lender has declined the borrower on their own, ask why.
7. Are you being rushed or pressured?
Guarantees are often signed in a hurry, at the end of a loan application, because someone else is waiting. A reasonable request will allow you time to read the documents and get advice. If you feel pressured by the borrower, the lender or a family member, or you do not feel able to say no, that is exactly when advice matters most. In limited circumstances a court can set a guarantee aside, for example where there was undue influence, but that is a difficult argument to run after you have signed and it is no substitute for getting advice first.
8. What has the lender told you, and what must it do?
Banks that subscribe to the Banking Code of Practice must follow extra steps before accepting a guarantee, including giving you key information about the loan and encouraging you to get independent advice. Other lenders may not be covered by the Code, so do not assume the same steps will be taken. Ask the lender what information it will give you, and keep a copy of everything you are sent.
9. Do you know how you could get out of the guarantee?
A guarantee does not end just because you want it to. In most cases the lender has to agree to release you, and it will usually want to be satisfied that the borrower can manage without you. Common routes are the borrower refinancing, paying the loan down, offering other security or a different guarantor, or selling the property. Ask now, before you sign, what the lender would require to release you, and whether the guarantee ends on a set date or only when the debt is repaid.
10. What happens if the relationship changes?
Separation, divorce or a falling out with the borrower does not by itself release you from a guarantee. If you are guaranteeing a loan for a partner, a former partner or a family member, think about what you would want to happen if the relationship ended. Our family law team can advise if a relationship is already ending and a guarantee is part of the picture.
11. How does it fit with your own plans?
A large guarantee can reduce what you are able to borrow, complicate selling your home and affect how you plan for retirement. If you are guaranteeing a loan for one child, think about how that sits with your wills and estate planning, and whether other family members would see it as fair.
12. Have you had independent legal advice?
This is the step that protects you, and many lenders will ask for it. An independent solicitor, one who acts only for you and not for the borrower or the lender, reads the documents, explains in plain English what you are agreeing to and checks that you understand the risks. Where the lender requires it, the solicitor signs a certificate confirming that you received advice. Advice before you sign is far more useful than advice after a demand arrives. Our guarantor documents page explains how we review guarantees and what you can send us.
Warning Signs: When to Slow Down
You do not have to say no, but you should slow down and get advice if any of these apply:
- You have not seen the loan contract or the guarantee.
- You are being asked to sign today.
- Nobody can tell you the maximum you could owe.
- The borrower will not share their financial position.
- Your own home is being offered as security and you have not spoken to anyone about it.
- The only advice on offer comes from someone who also acts for the borrower or the lender.
- You feel you cannot say no.
If You Would Rather Not Guarantee
Saying no is allowed, and it is better than signing something you cannot afford. MoneySmart notes there are other ways to help, such as contributing money towards a deposit. If the borrower is buying their first home, our first home buyers page covers the government help that may be available, which can change how much the borrower needs from family.
Guarantors in Maitland and the Hunter Valley
Guarantee requests across the Hunter tend to follow familiar patterns: parents helping children into a first home in Maitland, Thornton, Rutherford or Cessnock, owners of farms and lifestyle properties offering land as security, and small business owners and directors giving personal guarantees for company loans or commercial leases. Each raises slightly different questions. Our commercial leasing page covers lease guarantees, and the checklist above applies to all of them.
Frequently Asked Questions About Being a Guarantor in NSW
Should I be a guarantor for my child’s home loan?
It is a personal decision, and the answer depends on how much you could owe, what you are offering as security and whether you could cope if the loan went wrong. Many parents do it, but it deserves the same care as taking out the loan yourself. Get the documents checked by a solicitor who acts only for you before you sign, and ask whether the guarantee can be limited.
What is the difference between a guarantor and a co-borrower?
A co-borrower is a party to the loan and is responsible for repaying it from the start. A guarantor is not borrowing the money but promises to repay if the borrower cannot. The practical risk can be similar, because in both cases the lender can look to you for the debt, so read the documents carefully either way.
Can I withdraw after I have signed a guarantee?
Not simply by changing your mind. Releasing a guarantee usually needs the lender’s agreement, which commonly follows a refinance, a significant paydown or a replacement guarantor. Whether any other options apply depends on the documents and the circumstances, so get advice as soon as you have concerns.
Do I need a solicitor to be a guarantor?
Many lenders will not accept a guarantee without a certificate confirming that you received independent legal advice, and it is strongly recommended even when they do not ask. A solicitor reads the documents, explains the risks and can sign the certificate the lender requires.
What happens if the borrower stops paying and I am the guarantor?
The lender can ask you to repay the outstanding debt, and if the guarantee is secured over your property it may be able to sell it. A default can also appear on your credit report. Get advice as soon as you receive a demand, because acting early usually gives you more options.
Before You Sign, Get the Documents Checked
The best protection for a guarantor is advice before signing. Hills Solicitors reviews guarantees and security documents, explains the risks and your options in plain English, and acts only for you. To find out how it works, see our guarantor documents page.
Book a consultation with our team today, or call us on (02) 4933 5111. Check our FAQ page if you have any questions.
