Giving guarantees.

Lily and Noel wanted to buy their first home, but their bank told them they wouldn’t give them a loan unless they had someone else guarantee their borrowings.

Their bank told them that since they were intending to borrow $600,000, they would require an unlimited guarantee. They asked Lily’s brother Sam and his partner Riley if they could guarantee their lending.

Their lawyer met with Sam and Riley and explained the nature of the guarantee. Sam and Riley had bought their own home ten years ago and had paid down a good proportion of their mortgage. Sam and Riley were therefore shocked to learn that by giving a guarantee, the bank would be able to take security over their home and possess it if Lily and Noel couldn’t meet their repayment obligations. They also discovered that actually, the bank could come to Sam and Riley before going to Lily and Noel to repay the loan.

Their lawyer advised that they should not give the guarantee as they would essentially be stepping into the shoes of someone else’s borrowings and taking on their financial risk. She also explained the “chain of guarantees”; that if Lily and Noel decided to guarantee someone else with the same bank, Sam and Riley (and their home) would be tied into that new guarantee as well. Their lawyer also advised that the unlimited guarantee meant that Sam and Riley were liable for an unlimited amount, and that Lily and Noel (or any other guaranteed party) could also borrow further funds from the bank without telling Sam and Riley.