For guarantors whose borrower has fallen behind, and anyone weighing up the risk before they sign.
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The lender can ask you to pay the guaranteed debt, up to the limit in your guarantee, and can enforce any mortgage you gave, including over your home. Banks that follow the Banking Code of Practice must usually go after the borrower's own security first, keep you informed, and discuss alternatives before enforcing a mortgage over your home.
When the borrower misses repayments, the lender deals with the borrower first: reminders, then a default notice or formal demand. The borrower can ask the lender for a hardship arrangement, and often should.
If your lender follows the Banking Code of Practice, you should hear about it. Within 14 days, the bank must send you a copy of any formal demand or default notice it sends the borrower, tell you in writing if the borrower's financial difficulty has led to a change to the loan, and tell you if the borrower is still in default more than two months after the default notice. These notices don't apply to every guarantor. Company directors who are the sole director, trustee guarantors and partnership guarantors are excluded.
Once the borrower is in default, the lender can make a written demand on you under the guarantee. How far it can go, and in what order, depends on the lender.
A bank bound by the Banking Code won't enforce a mortgage or other security you gave, such as a mortgage over your home, until it has first enforced the security the borrower gave for the same debt. It also won't enforce a court judgment against you until it has done that and one of these has happened:
There are two exceptions. The bank can skip that order if, after the default notice and after being told about these limits, you agree in writing that they don't apply. It also doesn't have to enforce the borrower's security first if it reasonably expects the sale wouldn't repay a substantial part of the debt.
Many non-bank and private lenders are not bound by the Code. Their guarantee documents often let them come straight to the guarantor. Your guarantee says which rules apply.
No more than the limit in your guarantee. Depending on its wording, that limit can include interest, default interest and the lender's recovery costs as well as the loan balance. Under the Banking Code you can end your liability by paying the lower of what the borrower owes and your limit, or by another arrangement the bank agrees to.
If you gave a mortgage over your home, the lender can take possession and sell it as a last resort, after giving the notices the law requires. Before a Code bank enforces a mortgage over your home, it must encourage you to tell it about your circumstances so you can discuss other reasonable ways to repay. Refinancing, selling the property yourself, or paying out your limit are the usual alternatives, and each is worth weighing before the lender acts.
Contact the lender as soon as you receive a demand. The Banking Code says a guarantor in financial difficulty who has received a demand should contact the bank, and the bank will discuss the options. If you think the lender hasn't followed the law or the Code, you can complain to the lender and then to the Australian Financial Complaints Authority (AFCA), which accepts complaints from guarantors in many cases.
Not paying has consequences for your credit report too. If the guarantee covers a consumer loan, the lender can list a default against you once the conditions in the Privacy Act are met, including 60 days passing after it gave you notice of the borrower's default.
Yes, in principle. A guarantor who pays the debt is entitled to recover it from the borrower and to the benefit of any security the lender held for it. In practice, a borrower who has defaulted may have little left, so treat recovery as uncertain. Our guarantor's exit roadmap covers ways to reduce your exposure before it comes to this.
If you are about to sign a guarantee, read what the solicitor explains before you sign. We advise family guarantors and directors giving personal guarantees.
Understand the downside before you commit. Book independent advice at our Melbourne CBD office.