“A year or two ago I asked my sister to stand as surety for me so I could buy a house for my family. I had a good job and felt comfortable in asking her to do so. She agreed and signed a surety agreement with the bank. With Covid-19 I’ve now lost my job and despite getting payment holidays from the bank, I’m not sure I will be able to make my mortgage instalments. Where does this leave my sister? Will the bank now expect her to repay my outstanding mortgage loan?”

To answer your question, it is probably appropriate to explain what a personal surety is. Typically, when a bank lends money to someone, they do so with the expectation of receiving their capital and interest back on the loan amount advanced. This means they need to be sure that instalments will be repaid and that there is security in place should this not happen. Enter the surety agreement, which banks often require persons to sign in their personal capacity to stand surety for a debt. This may be the same person or another person providing surety for the person borrowing the money (“principal debtor”) from the bank (“creditor”). 

What such a surety means is that you as “surety”, in your personal capacity, promise to repay the debt and interest incurred by the principal debtor, on behalf of the principal debtor, in the event that they do not meet their obligations. The result is that if the principal debtor is unable to repay his debt, the surety can be held legally liable to repay the capital loan amount that was advanced and any interest incurred thereon.

So, must the bank first try and recover the debt from the principal debtor, by for example repossessing the house? This would be the general rule that would be applied in terms of our common law, but in most cases surety agreements specifically stipulate that the surety binds herself “as surety and co-principal debtor”. If this is the case, the creditor will be able to hold the surety liable for the principal debtor’s debt from the get-go should the principal debtor default on payment, and need not first attempt to recover the outstanding debt from the principal debtor, including taking drastic steps such as repossessing their assets should they not be able to pay or take over the obligations of the principal debtor.

To answer your question, depending on the wording of your sister’s surety agreement, there is a strong likelihood that the bank will require your sister to stand in for your debt should you fail to make payments on your mortgage loan. Our advice is to obtain legal advice to assess the terms of the surety agreement and your sister’s risk should you fail to make payments. This will allow you to assess how to best address the situation at hand.