Mortgage Guarantee Advice
Mandatory Legal Advice for Mortgage Guarantees
In the past, it was a simple matter of signing a contract to provide a guarantee for someone’s mortgage. This involved making a legal promise to put up your own assets (usually real estate) to protect the bank in the event that the borrower defaulted on their loan. These documents were, and remain, very legally complex and many people did not fully grasp the serious consequences that can result from providing a guarantee. People did not understand that the bank will not hesitate to sell your house out from under you to cover the loan default.
In recent years, a guarantor successfully sued a lender because the complexities of the mortgage guarantee were not properly explained to them. It was found that bankers do not have requisite expertise to provide advice on legal contracts. Additionally, bankers have a conflict of interest where they want to create the loan, so they therefore have an incentive to have the guarantor sign the contract. The bank benefits from the additional security of the guarantee, while the guarantor takes a substantial risk.
Because of this, the law changed which then required that a mortgage guarantee could only be provided if the guarantor obtained independent legal advice from a lawyer. Firstly, a lawyer has the expertise to advise on contracts. Secondly, a lawyer has no conflict of interest because they have no stake in the security of the loan.
Did you know that any default of a mortgage condition can result in the bank selling your asset? For example, it is a condition of most home loans that the house remain insured. Imagine an uninsured million dollar house burns down leaving nothing but a four hundred thousand dollar block of land and a clean up bill. If the borrower still owes nine hundred thousand, the bank can demand that five hundred thousand dollar shortfall from the guarantee. That is why providing a guarantee can be dangerous beyond simply worrying about if the borrower is paying the home loan. It can therefore be prudent to insist the borrower provide yearly confirmation that the home insurance is paid.
Carter DIckens Lawyers can help with fixed fee legal advice for mortgages and guarantees, home loans, investment property loans, SMSF loans, director loan guarantees, individuals and trusts.
Have you been asked to “go guarantor” for someone else's loan? It might be a child you are helping on to the property ladder or maybe a partner. There are risks involved in giving a guarantee which include being left on the hook for payments if the person paying the loan cannot meet their payments on default on the loan. There may be hidden costs including bank charges and interest as well as legal fees. We can give advice on these indemnities and the legal effect on you.
You might be refinancing a home loan to a cheaper rate and the bank has asked you to obtain independent legal advice. You will need a lawyer to sign off on having given you this advice. This is often referred to as “solicitors certificate”. A statutory declaration (stat dec) may need to be signed at the same time. If things go wrong, the worst case scenario you can put your house at risk of foreclosure. Most of the time though it's a bank requirement and we aim to keep things simple, time sensitive and cost effective. It might be for your own home, a loved one, or even for an investment property.
You may have a business that is in a proprietary limited company structure that owns a property or some other business investment loan and you need to give a personal guarantee to cover the loan. Another example is that you have been appointed as a trustee under a family trust or an estate trust. Again you may be called upon to give a guarantee in that scenario either in your fiduciary, professional or personal capacity.
Increasingly, people are using self managed funds to purchase commercial or residential real estate within their SMSF. This often requires you to provide a guarantee and obtain legal advice.
Reverse mortgages are becoming more popular as people can become “asset rich, cash poor” in their retirement years. These types of product offerings from banks may be beneficial but come with some risk. It is often a bank requirement you obtain advice on a reverse mortgage.
We have provided advice to many people in these and other scenarios. For all of these types of documents we are able to offer advice on these very important documents and make sure all the documents are in order and you fully understand what you are signing. We can refer you for accounting or financial planning advice if required too.
This is not as simple as just witnessing your signature on the documents. We will need to review the documents (preferably ahead of time - if you can email them to us the day before that would be perfect) and give you advice in a face-to-face meeting. You can present your ID at the meeting so we can verify your identity.
Our fixed fee service includes review of the documents, a meeting and a written letter of advice. In the event you require more complex advice, we are happy to give you an estimate of our fees for additional documents or advice.
We can usually assist on short notice so please contact us to book a meeting!