Maria and Terry had lived on the North Shore their whole lives. They had three grown-up children, and Maria and Terry were hoping that they would also settle on the Shore and take advantage of the wonderful lifestyle. They were also keen for grandchildren, and babysitting duties would be a bit easier if they were in the same location.
Maria and Terry’s eldest daughter, Julia, had been with her partner, Steve, for over ten years. They had recently married and were looking for a home to buy. They found the perfect house in a quiet corner of Birkdale. They had saved really hard, but as Steve was self-employed (he was a mechanic and had recently purchased the mechanic shop he had worked in since he was an apprentice), the bank wasn’t too happy about lending them money as according to the bank they didn’t have a stable income.
Maria and Terry were excited that Julia and Steve would be living relatively close to them and were keen to help them as much as they could. Their own home was in a trust, but was mortgage free. They offered to guarantee the borrowings of Julia and Steve and put their own home up as security. Their lawyer told them that it was becoming increasingly common for parents to help their children into homes – whether that be by lending or gifting some money, or by guaranteeing borrowings. Maria and Terry didn’t have the spare cash to actually gift Julia and Steve some money, but they were happy to guarantee the borrowings.
Things went well for a couple of years, until Steve’s business hit a rocky patch. A larger company with fixed prices for servicing opened just down from Steve and his business took a real hit. Maria and Terry were horrified when one day they came home and there was a letter of demand from the bank in the mailbox. Steve’s company was in default of its obligations to the bank, and the bank was looking to Maria and Terry to pay as guarantor. Maria and Terry were shocked as they didn’t think they had guaranteed Steve’s business, but when they went to see their lawyer she told them that guarantees chain – Maria and Terry had guaranteed Julia and Steve and Julia and Steve had guaranteed Steve’s business. Therefore, Maria and Terry had, in effect, guaranteed Steve’s business.
Guarantees are terribly important documents and should not be entered into lightly. It is important to be aware of all possible scenarios.