Borrowing money wisely requires legal advice

Press, 29 June 1988, Page 42

Borrowing money wisely requires legal advice

This week, the Canterbury District Law Society is running a free phone-in legal information service (phone 650-090 between 10 a.m. and 7 p.m.) each day of Law Week. “The Press” will run an article about an aspect of the law, written by a local lawyer. Today’s article is by JIM DEANS, of Weston, Ward and Lascelles.

Borrowing money or acting as guarantor for someone else who wants to borrow money are two areas that can have expensive consequences for those who do not seek legal advice. On the surface, it may seem a good idea to refinance your mortage for another one at a cheaper rate of interest. But the advantages can pale into insignificance when the unwitting homeowner is* faced with penalty interest rates from a lender.

A lawyer may seem like an unnecessary expense, but that same lawyer’s familiarity with mortgage

clauses may end up saving you a lot of trouble and expense. Penalty interest rates, payable when a mortgage is paid up before the full term has elapsed, can increase interest payable over the short term by 25 per cent, in order to compensate the original lender.

There have been cases where borrowers have been charged interest on interest when they have repaid mortgages, only to have a lawyer examine the mortgage documents and find that the lender was not entitled to claim as much money. Once

again, a lawyer’s familiarity with mortgage clauses may save a lot of money. The first advice a lawyer will give clients inquiring about mortgage interest rates is to think about their present situa-

tion. Find out what rate you are paying now, and whether that rate has recently moved downwards. If so, how does it compare with other rates? If that comparison is unfavourable, it is very

easy to jump to the conclusion tiiat it would be cheaper to refinance. However, a lawyer will urge caution, and will suggest that a client find out the precise costs of refinancing.

Lenders other than banks normally charge penalty interest if a mortage is repaid before the term has elapsed. This penalty interest can be as much as three months interest, although a lawyer can negotiate on behalf of the client to have less penalty interest paid.

A lawyer can also advise whether a floating or fixed rate of interest is better for the client. Fixed interest rates can be best for those who need to know how much they will be paying, so they can plan ahead for a few years. But for most people, wherever there is a chance that the interest

rate may go down, a floating rate is preferable. Legal advice may prevent an expensive mistake. Lawyers can also intervene when a client falls behind with hire-purchase payments, offering to negotiate with the lending institution for new instalment details. The advice is always to seek the help of a lawyer before a situation deteriorates and the consequences become more serious.

Acting as guarantor for someone else’s borrowing is another very hazardous process and one which should never be contemplated without legal advice, even when it involves family members. Anyone who acts as a guarantor for someone else, must realise that they put all of their own assets on the line. It may sound drastic, but cases of retired parents facing bankruptcy because their

adult children have defaulted on mortgages are not uncommon. On the face of it, it might seem charitable and a good idea to act as guarantor for a loan for your son’s business. After all, he has done very well in the business so far — and he is not actually asking for money. But the business world is fickle, and the successful, thriving business may soon get into trouble. Imagine the father’s shock on finding that his home has to be sold to pay for his son’s business debts. And how does he feel some time later,

when he discovers that his son’s business had acted as guarantor for another person’s borrowings and that the father is now responsible for those as well. The message is that acting as a guarantor is a serious matter — after all, you would not be asked to act as guarantor if there were not any risk involved. It is something that should never be embarked on without seeking your own legal advice — not just that of the borrower’s legal adviser and not just advice from the lender.

GOOD WILL MORNING, JULY 2 (FREE SIMPLE WILLS): If you wish to make a simple will free of charge, contact one of the law firms listed in “The Press” on Tuesday. “Law Help 20/20”: If you would like to know more about this introductory interview scheme, phone 650-090 between 10 a.m. and 7 p.m.