The guarantors of mortgage loans can take some risks and this is an undesirable mission for many. But there is a protection for guarantors to make them feel safer and not to be severely damaged when there is a mortgage debt.
What are the implications for home loan guarantors?
The guarantors of a loan must provide their own assets as collateral if the bank customer defaults on the loan. This way, the guarantor is tied to a debt of another individual.
The answer is simple. Individuals are usually guarantors of people they know – family, friends or even colleagues. The truth is that we often do not know how to respond negatively when asked about such a sensitive issue, since if the person does not accept to be guarantor, the bank customer may not be able to get the credit requested.
To this extent, many Portuguese become guarantors and this is undoubtedly a high burden. In particular, home loan guarantors, as the loans are of very high monetary value, make it difficult to financially bear debt burden on someone else in the event of default by the borrower.
However, before accepting to be guarantor of someone, it is necessary to realize with that person if it possesses ability to repay the financing in question. Many Portuguese borrow a loan that does not meet their needs or has the best conditions.
If the debtor fails to pay, what happens to the guarantor?
Mortgage guarantors are the most affected in the event of default.
When the debtor does not settle his monthly installment and defaults on the bank, the bank turns to the guarantor to recover the borrowed amount. Banks want to minimize the risk of default on payment and thus require a guarantor for some loans, notably mortgage loans.
In this situation, the guarantor is obligated to assume the payment liabilities of the debtor and, if he refuses to pay the bank, he may be seized on his maturity and ultimately his assets.
How can guarantors protect themselves?
In the event that a home loan guarantor – or any other credit actually – has the consequences described above, there are some safeguards to consider.
First of all, since 2013 it has become mandatory for financial institutions to inform the guarantor, within 15 days, of the default on the payment of the credit in question, so that it is not caught by surprise.
But the truth is that guarantors have rights which can be granted to them in the event of default by the debtor to the bank, in particular the right to prior extinguishment and the right to extrajudicial proceedings to settle defaults.
Prior Excussion Benefit
The benefit of prior excussion is usually provided for in surety agreements. This guarantees the guarantor that the bank will first seek the debtor’s assets to settle the debt in question before resorting to the guarantor’s assets.
It is important to note that this benefit should not be waived by home loan guarantors, as without this bank may first settle the bank’s customer’s debt with the guarantor’s assets.
Another right available to guarantors is the Extrajudicial Procedure for the Settlement of Defaults (PERSI). This obliges financial entities to negotiate debts with debtors before filing a lawsuit against them.
In this case, the guarantors are informed in advance of the default of the debtors, and may also integrate the negotiations and the payment plan of the installments in the default.
Guarantors may also claim from the borrower the amount or assets they have spent to repay the debt in question, although this is a rather lengthy process as there is a need for judgment by the courts and if the borrower was unable to pay his credit, he will probably not be able to pay the guarantor either.
It should also be noted that the request for integration into PERSI must be made by the home loan guarantors within 10 days after being informed by the bank of the default of the debtor.
The extraordinary regime was extinguished in 2015
Until 2015 (when this scheme ceased), guarantors could still appeal for protection measures of the extraordinary scheme if they had not met the economic conditions to assume the obligations of debtors.
It is important to note that it was also necessary that borrowers were not financially able to assume their own obligations so that guarantors could apply for this protection. Unfortunately, it is no longer possible to require this type of protection.
Therefore, and in conclusion, guarantors must always take into consideration their duties, but also their rights when debtors default.
Note that we should always be aware of our rights so that we can know how and when to act in such cases, especially when home loan guarantors are in debt to repay.