Personal guarantees: what you need to know

December 2024

Banks and other lending institutions will sometimes only agree to lend money if they receive a guarantee of repayment from a third party. Common situations include when parents are asked to guarantee a first home loan for their children or when guarantees are sought for vehicle finance or business/commercial lending.

Whether a guarantee is sought will depend on the lender’s assessment of the size of the loan against the borrower’s overall capacity to service the debt.

Guaranteeing someone else’s debt is a significant decision that should never be made lightly. In some cases, it can be a helpful way of assisting children to obtain finance for their first home, or to obtain capital so that a new business can get off the ground. In other cases, providing a guarantee can be financially ruinous if the guarantor has given a significant asset such as their home as security and the borrower subsequently defaults on the debt.

The contract of guarantee

Every contract of guarantee must be in writing and signed by the guarantor, but beyond that basic requirement, guarantees can differ widely in their terms and the level of obligation that is imposed. For that reason, and because of the general implications of providing a guarantee, any potential guarantor should seek independent legal advice about the responsibilities and obligations they are potentially taking on before they sign.

A guarantee may be unlimited or capped to a certain amount. Unlimited guarantees with no limit on how much can be sought from the guarantor are the most common as they provide the greatest comfort to lending institutions. In addition, most guarantees are “all obligations”, which mean that the guarantor will be liable not only for the amount owed by the borrower at the time the guarantee was given, but also for any future debts that the borrower may owe to the lender.

The scope and extent of a guarantee can be negotiated and narrowed down in some circumstances, but ultimately if the proposed terms are unacceptable to the lender, then they can simply refuse to grant the loan.

Key things to consider

In the event of a default, the lender is generally not required to seek repayment from the borrower before calling on a guarantor. In addition, if more than one person has provided a guarantee, the lender usually has the discretion as to which guarantor it will pursue and the order in which it will do so.

Many lenders require guarantors to provide security in the form of a mortgage over their home or other valuable property.  If the lender calls on the guarantee and the guarantor is unable to pay, the lender can exercise their right to sell the secured property to recover the money that is owed. This can have obvious consequences for a guarantor if their family home is the security for the guarantee.

If the guarantor was not required to provide security, then the lender can issue legal proceedings to recover the money and then proceed to enforce any judgment through the civil courts.

The ability to obtain a release from the guarantee will depend on the nature of the guarantor’s obligations. Where a guarantee is limited to a specific loan which has been repaid, then obtaining a discharge from the lender will be straightforward. In the case of an “all obligations” guarantee with no specific end point, the lender might only be prepared to discharge the guarantee once the borrower’s overall indebtedness has reduced to a certain level.

It is also important to understand that agreeing to be a guarantor may also affect the guarantor’s own financial capacity and ability to access finance themselves.

Get advice before signing

For these reasons, it’s important to carefully consider how being a guarantor might affect you, your personal assets, and perhaps even your family members if they live in a home which might be given as security for the guarantee.

If you have been asked to provide a personal guarantee, contact our property law team to obtain independent legal advice before signing any documents and entering into any binding commitments.