Guarantor

When you become a mortgage guarantor you take on responsibility for someone else’s mortgage. Your role is to give the lender confidence that any money they lend will be repaid in full and on time. This means committing to cover repayments if the original borrower is unable to. Parents will often act as a gurantor for their children when taking out their first mortgage. While this can be a really good way to help your family, if you’re considering it you need to be fully aware of what you’re signing up to before you agree to be a guarantor. Most guarantor loans or mortgages will require you to repay the entire amount should the original borrower be unable to pay. This makes you jointly liable for the mortgage and means that the bank can and will pursue you for the debt should the main borrower fail to pay. If things worsen this could include having your own home repossessed to repay the mortgage!

Increased borrowing mortgages

Some guarantor mortgages allow the borrower to take out a bigger mortgage than normal, asking the guarantor to guarantee the additional borrowing.

For example, if the borrower needed a £150,000 mortgage to purchase a property but ordinarily would only qualify for a £100,000 mortgage, acting as a guarantor could enable them to borrow the extra cash.

With this type of guarantor mortgage you may be able to specify that you are only guaranteeing to repay the additional borrowing (£50,000 using the example above) rather than the whole mortgage.

Acting as a guarantor is a long term financial commitment which can often last for many years. In most cases you will be liable for as long as the original mortgage terms and conditions remain in place. Weigh up whether you have the financial freedom to act as a guarantor for the full duration of the loan agreement. Will your income drop in the coming years or will being a guarantor be a greater financial burden in 5 or 10 years? You will need to bear this in mind when deciding if it’s something you should do.

Can you be removed at a later date?

Once the original borrower has built up enough equity in their property they should be able to re-mortgage release you from the loan. This will still be dependent on their individual circumstances and reliant on being able to afford to take on sole responsibility for the mortgage. If property prices fall or the income of the original borrowers isn’t high enough you may need to continue as a guarantor for several years.

The vast majority of guarantor schemes will require you to make the loan repayments should the original borrower default. In most cases this doesn’t happen, but you need to be confident that you could afford to make the payments should the worst happen. You also need to ask if you are happy to pay should the original borrower get into financial difficulty. Could you cope if they lost their job and couldn’t pay on time? While no one entering a guarantor loan plans to default you still need to plan for the unexpected.

If all goes to plan being a guarantor will not appear on your credit report and subsequently shouldn’t have any impact on your credit rating.

However, if the agreement that you guarantee falls into default then this will be added to your credit report. If the account doesn’t get paid, a county court judgement could also be lodged against your account. This means that as long as the account is paid on time, your role as guarantor won’t be divulged and have no bearing on the credit rating, it’s only if something goes wrong and you fail to pay that your credit history will be damaged.

There is usually no upfront cost to being a guarantor and if the original borrower continues to pay the mortgage you shouldn’t have to pay anything at all. But remember, the purpose of a guarantor is to pay the mortgage should the main applicant default or miss any repayments – so if this happens it could cost you thousands of pounds.

This can be a tricky and sometimes unpleasant question to consider but it’s vitally important to put aside you relationship with the main mortgage applicant and look at whether you can trust them to make the repayments.

Ask yourself before making a decision:-
1. how much they earn?
2. what are their job prospects and security?
3. what existing financial commitments they already have?
4. what’s their track record like when managing their money?

Of course, if you know the applicant well (which you should if you’re considering acting as a guarantor on their mortgage!) you can also weigh up how trustworthy they are in other aspects of their lives to help make your choice. Take a long hard look at someone before making such a big financial commitment.

Some first-time buyer schemes allow parents to help their children onto the property ladder in other ways. These can include depositing a set amount of savings into a fixed term account for a set period which will act as boost to your child’s deposit for the duration of the account. These helping hand schemes will pay you interest for the duration your money is in the account and won’t require you to guarantee the loan repayments beyond the amount of savings you’ve placed in that account.

Acting as a guarantor is a big financial decision, perhaps only second to taking out a mortgage of your own. This makes seeking independent financial advice from a FCA authorised advisor, familiar with guarantor mortgages, can be especially worthwhile. A qualified advisor will be able to sit down with you to discuss the legal and financial obligations that becoming a guarantor entails and explain anything you’re unsure of before you commit.

Given the risk associated with acting as a guarantor you may want to consider asking the borrower to take out Income Protection Insurance.

This would protect you to a certain extent should they lose their job through illness, injury or redundancy and mean that you wouldn’t be called upon to repay the mortgage unless the problem went on long term. You may also want to consider taking out similar cover yourself to ensure that your income is protected fully too.

Acting as a guarantor is a big financial decision, perhaps only second to taking out a mortgage of your own. This makes seeking independent financial advice from a FCA authorised advisor, familiar with guarantor mortgages, can be especially worthwhile. A qualified advisor will be able to sit down with you to discuss the legal and financial obligations that becoming a guarantor entails and explain anything you’re unsure of before you commit.

Agreeing to act as a guarantor is a contractual obligation and very difficult to get out off should things turn sour. The best practice is to treat the loan as if it were your own and only agree to the role of guarantor if you are willing and able to lend a hand financially should the need arise.