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Guarantor Advice and Independent Solicitor’s Certificate

Loan with Guarantor Advice 101

Banks and other financial institutions will often require home loan borrowers and guarantors to get independent guarantor legal advice and obtain an independent solicitor’s certificate from a guarantor lawyer before they sign a guarantee regarding a home loan. An independent solicitor’s certificate is a certificate of independent guarantor legal advice which certifies that a guarantor lawyer has provided you with legal guarantor advice concerning a loan and a guarantee.

What should I know about giving a guarantee and getting guarantor advice?

Guarantees vary with the purpose of the loan, but you should be aware that providing a guarantee is a big responsibility. If the borrower does not comply with their obligations under the loan then the guarantor may have to pay back the entire amount outstanding plus interest, charges and fees. If the guarantor cannot pay the bank may sell their assets including their home.

You do not have to enter into a guarantee, and you will not directly get anything out of it. A useful website with more information about what you should know (and when/why you should get guarantor legal advice in Perth) can be found at the Financial Rights Legal Centre.

Why is the bank / financial institution requiring me to get an independent solicitor’s certificate?

The reason that banks and other financial institutions require you to get independent guarantor legal advice is usually that the guarantor is taking a risk for which they are receiving no reward or an indirect reward, such as a parent who guarantees the mortgage for their child’s home loan hoping for a better future for that child. In addition to obtaining guarantor advice it is also recommended that you obtain financial advice. A good starting point is the free service provided by the Financial Counsellors Association WA.

How much do I have to go guarantor for?

Every loan is different but in a typical situation where a parent is going guarantor for their child, they may expect to go guarantor for 20% of the purchase price, plus any money borrowed over and above the value of the property.

What is the impact of separation or divorce on guarantors?

Many guarantors want to agree to be guarantor for their child’s loan, but when your child is buying a property as joint tenants with their spouse or partner, it is important to remember that you are usually agreeing to be guarantor for that spouse or partner too. In the event of divorce, one person may stop paying the loan and the lender may come after the mortgage guarantor for payment.

Guarantor Advice for Independent Solicitor’s Certificate at Foyle Legal

What Guarantor advice and borrower advice does Foyle Legal provide?

Foyle Legal will provide guarantor advice and explain the relevant parts of the following documents:

  • The guarantee and indemnity document
  • The mortgage document
  • The borrower’s lending history (if applicable)
  • Any necessary statutory declarations

After the guarantor legal advice has been provided, if Foyle Legal is satisfied that you understand the documents, Foyle Legal may also provide the guarantor with an Independent Solicitor’s Certificate stating that the guarantor has received guarantor advice and the effect of the guarantee has been explained to the guarantor.

What is the cost for an independent solicitor’s certificate or legal advice for a guarantor?

Foyle Legal normally charges $330 (inclusive of GST) to meet with you, provide guarantor legal advice and explain the guarantee and associated mortgage, then provide you with a Solicitors Certificate. A higher amount may be payable if your situation is complicated. Call Foyle Legal for more information and we should be able to provide you with an assessment over the phone.

Can Foyle Legal provide guarantor advice if I live oversees, regional, or work fly in fly out (FIFO)?

Lawyers providing guarantor advice and borrower advice are required to identify the people they are acting for so a face to face meeting is preferred, but Foyle Legal may be able to assist you using Skype or a similar online medium.

Understanding Guarantee and Indemnity

 If I sign a guarantee, what will I be liable for?

You and the other guarantors (if there is more than one guarantor) guarantee (ie undertake to pay) any money owed to the lender by any of the borrowers named in the guarantee. This includes any money owing now or at any time in the future. The  Credit Regulations 1985 Form 11 sets out things you should know about guarantees.

 What is an indemnity?

Guarantees also typically contain an indemnity. This means that if the obligation of the borrower to pay the lender is invalid or unenforceable, you are still liable to make the payment. A good example of this is if the borrower becomes bankrupt. The borrower may not be legally liable to pay, but the guarantor will still be legally liable.

What are the consequences of a guarantor signing a guarantee and indemnity?

If the borrower defaults, the borrower’s bank or financial institution will usually demand payment from the guarantor. If the guarantor can not pay or does not pay then if the lender holds a mortgage or other security from you, the lender can enforce that security to recover money due by you under this guarantee (eg if the security is real estate the lender can obtain vacant possession of the property, require the tenants to pay rent direct to the lender, or sell it). For additional information ASIC have created a useful information sheet called Love and Loans.

Is my guarantee for a limited time?

This will vary from loan to loan, but usually the answer is no. The guarantee remains in place for the entire duration of the home loan.

Foyle Legal often encounters clients who have been informed that the guarantee is for a limited time. This is typically because the borrower has been told that they could refinance their loan after they have paid off a certain amount of the home loan, or the property has increased in value. It is not certain that either of these things will happen and guarantors should view a guarantee as a long term obligation.

Situations where Guarantor legal advice is Needed

What are the most common situations where guarantor legal advice is needed?

 – Home Loan Guarantee – Borrower Contributing Less than 20% of Property Value

Where a borrower is purchasing a house and the borrower is paying less than 20% of the value of the property as a deposit, the bank or other financial institution giving the mortgage will require a person to take out lenders mortgage insurance. Mortgage insurance is an insurance policy that protects a mortgage lender or title holder in the event that the borrower defaults on payments, dies, or is otherwise unable to meet the contractual obligations of the mortgage. As the amount the borrower is borrowing increases, the amount that they have to pay in mortgage insurance increases exponentially.

Banks and other financial institutions often do not require that borrowers obtain mortgage insurance if another person guarantees that they will pay around 20% of the value of the property in the event that the borrower defaults on the loan. This person is called a guarantor. Usually the guarantor of the loan is a parent or both parents of the borrower.

The guarantor is effectively taking on risk with no reward, except for the borrower’s happiness, and for this reason the guarantor is required to obtain independent guarantor legal advice. Guarantors’ are often at a stage in their life where they are considering stopping working in the next few years. If the guarantor is retired with a low income the risk of being a guarantor can become very high and the guarantor risks the bank selling their home if the guarantor cannot meet the required repayments under the loan.

– Husband/Wife or de facto guaranteeing the debt of their partner

The usual reason that one partner wants to buy a property without their partner is for investment purposes and to reduce the amount of tax that they have to pay. It is often the case that a bank providing a mortgage will require that an additional mortgage be taken over the family home of the borrower and their partner if that property is owned as a joint tenancy or tenancy in common.

Occasionally partners will also be called upon to guarantee the business loans of their partner’s business, there is an example of this below.

– Family Trusts

If a property is purchased in the name of a family trust, or discretionary trust, then the trustees are often required to sign as borrowers or guarantors in their own name, and as trustees. Occasionally lenders require beneficiaries to become guarantors and obtain independent guarantor advice.

 – Self Managed Super Funds

One form of investment that is becoming increasingly popular is investing through a self managed super fund. In this model, the trustees are often proprietary limited companies controlled by the beneficiaries.  It is often the case that all parties involved have to get guarantor legal advice.

Other situations where guarantor legal advice may be required

For a helpful discussion of other situations where a guarantor advice solicitor certificate may be required see Legal Aid site regarding guarantors.

Guarantor Advice Case Studies

Son borrowing over 100% of loan

Paul and Joan are immigrants who want to guarantee a loan for their 35 year old son and his partner of 8 months. Paul has previously owned a house with his son and is confident that his son will repay the loan. After receiving guarantor legal advice from Foyle Legal, Paul and Joan realised that their son and his partner are borrowing over 100% of the purchase price and their son’s partner is not giving a mortgage over her own property. Paul and Joan decide to have a serious discussion with their son before they agree to be guarantors for the loan.

Mortgage documents incorrect

Samuel and Lisa want to guarantee a loan for their son who is a business owner. The amount they are agreeing to guarantee is $175,000. After receiving guarantor advice from Foyle Legal it becomes apparent that the mortgage documents prepared by the bank are for the whole amount of the loan rather than the $175,000 for which they agreed to be guarantor. Samuel and Lisa go to the bank to discuss the Mortgage documents before they sign.

Guarantor for Husband’s business debts

Paula’s husband, Carl was a partner in an unsuccessful Bakery franchise. Carl has sold the business and has outstanding debts of $100,000. Paula wants to agree to the bank taking a $100,000 Mortgage over the house where they live. Paula is sure that it will not take long for her and Carl to pay off the debt. Foyle Legal gives Paula guarantor advice and explains to Paula that she may be opening herself up to considerable liability in the event that her relationship with Carl breaks down. After considering the advice by Foyle Legal Paula decided to proceed.

Guarantor Advice for Guarantee Legal Advice Certificate

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