Whether you are helping a family member buy their first home or backing a company loan as a director, providing a personal guarantee is a serious legal commitment. Understanding what it involves, and what is at stake, is essential before you sign anything.

A significant part of our legal practice involves helping individuals and businesses acquire assets. Often, this involves some form of loan or other finance arrangement. In many of these transactions, the question of personal guarantees arises.

When Do Personal Guarantees Come Up?

There are two common scenarios in which you may be asked to provide a personal guarantee.

The first is in a business lending context. If you control a company that is borrowing money from a bank or financial institution to acquire an asset or fund a business venture, it is likely that the lender will require personal guarantees from the directors of the company.

The second, and perhaps more widely known scenario, is in the context of residential property purchases. This is where the term “going guarantor” is most commonly used. Sometimes a purchaser will not have enough deposit to satisfy the lender’s required loan-to-value ratio (LVR) without triggering a requirement to take out lender’s mortgage insurance (LMI).

Banks and lenders require you to have a certain percentage of the value of the property you are purchasing in cash. Similarly, in a business context, while the percentages may differ, lenders will usually require you to have a certain percentage of the business asset you are acquiring, or offer security other than the asset itself, in order to advance your loan.

To waive some of these conditions, a bank or lender may accept a personal guarantee from an individual or individuals related to the borrower.

What Is a Personal Guarantee?

A personal guarantee is a promise made by an individual who is not the borrower that, should the borrower fail to meet its obligations to repay the loan, the guarantor will step in and either satisfy the debt themselves or, in the case of a limited guarantee, satisfy the debt up to a pre-agreed limit.

What Assets Are at Risk?

The practical reality of a personal guarantee, whether in the context of residential real estate or business lending, is that the guarantor’s personal assets are at risk if they are required to make good the borrower’s obligations under the relevant loan agreement.

This includes assets such as the guarantor’s home, cash held at bank, and any other assets they own.

Personal Guarantees and First Home Buyers

As a result of a robust property market, personal guarantees, often provided by parents, have become a very common way for first home buyers to enter the market. Without a guarantee, many buyers would be locked out for a long period of time because they do not have sufficient savings to meet the lender’s LVR requirements, or they would face the often significant cost of lender’s mortgage insurance.

Personal Guarantees in Business Lending

In a business context, personal guarantees serve as a safeguard for the lender. Companies may have little or no assets that can be used to satisfy a judgment if the lender is required to pursue the company for failing to repay a loan. A personal guarantee from a director provides the lender with an additional avenue to recover the debt.

What Should You Do Before Providing a Guarantee?

If you are considering providing a personal guarantee of any kind, you need legal advice to understand what you are committing to.

If you are considering guaranteeing the obligation of someone other than yourself, for example going guarantor for a child or relative purchasing real estate, you also need to satisfy yourself as best you can that they are likely able to meet the loan repayments they will be required to make.

Before signing a guarantee, consider asking the borrower about:

• Their current income and employment stability
• How they would fund any increase in repayments, for example as a result of an interest rate rise
• The full details of the loan terms, including the total amount and repayment schedule

If you are putting your assets at risk for someone else’s benefit, you need to have as much information about the transaction as you possibly can.

Get Experienced Legal Advice Before You Sign

Providing a personal guarantee is not a formality. It is a binding legal commitment that can have serious financial consequences. Before you agree to guarantee anyone’s loan, whether for a property purchase or a business venture, it is important to understand your rights and obligations.

Our experienced team can review the terms of any proposed guarantee, explain the risks involved, and help you make an informed decision. Contact us to discuss your situation.