Guarantor loans and mortgages are one way to help someone borrow money if they’re struggling to get approved by lenders – for example, this might be a young person with a limited credit history, or someone with a bad credit history. There are risks involved for both borrower and guarantor, so you should enter a guarantor agreement armed with all the facts.
What does being a guarantor mean?
Being a guarantor involves helping someone else get credit, such as a loan or mortgage. Acting as a guarantor, you “guarantee” someone else’s loan or mortgage by promising to repay the debt if they can’t afford to. It’s wise to only agree to being a guarantor for someone you know well. Often, parents will act as guarantors for their children, to help them take that first step onto the property ladder.
Can anyone be a guarantor?
Almost anyone can be a guarantor. It’s often a parent, spouse (as long as you have separate bank accounts), sister, brother, uncle or aunt, friend, or even a grandparent. However, you should only be a guarantor for someone you trust and are willing and able to cover the repayments for.
To be a guarantor you’ll need to be over 21 years old, with a good credit history and financial stability. If you’re a homeowner, this will add credibility to the application.
Whether you’re considering asking someone to be a guarantor, or you’ve been approached by a family member or friend in need, you need to be aware of the possible financial risks.
Why would someone need me to be a guarantor?
It’s most likely one of the reasons below:
- They’re a borrower with no credit history (e.g. a young person, or someone new to the country)
- They’ve just started a new job
- They have a low salary
- They’ve got a low credit score
Perhaps they need a guarantor for a rental property, a loan, car finance, or a mortgage. Whatever the reason, you need to be close enough to the person to discuss their finances openly.
Before agreeing to be a guarantor you need to ask yourself:
- Why do they need me to be their guarantor – is it because they have a bad credit history? And if so, are they likely to manage the repayments?
- Are they responsible?
- Do they need the loan? (Is it for something they really need, or could they save up for it instead?)
- Can you afford to pay back the loan if they can’t or won’t?
- Would having to cover their repayments affect your relationship?
Being a guarantor for a rental property involves you vouching for the tenant. If the tenant is unable to meet their obligations under the tenancy agreement, you (the guarantor) will be legally bound to pay out – either for overdue rent or damage to the property.
Will being a guarantor cost me money? If so, what else could I lose?
Being a guarantor can cost you money if the borrower can’t keep up their repayments, as you will have to make them instead. If you’re unable to meet the repayments, you could risk having your own home repossessed.
Will I have to be a guarantor for the duration of their whole mortgage?
You don’t necessarily have to remain a guarantor for the whole mortgage term (e.g. 30 years). Once the borrower has built up enough equity, most agreements will allow them to remortgage and remove you as guarantor.
Can I stop being a guarantor for a loan?
Once you’ve signed a loan agreement and the loan has been paid out, you can’t get out of being a guarantor. The lender won’t remove you from the agreement because your credit history, employment status and other influences all had an impact on the approval of the loan.
Can I be a guarantor with bad credit?
Guarantors with a bad credit history are not likely to be accepted by lenders so it’s unlikely you’ll be able to act as a guarantor if you have a low credit score.
Does being a guarantor affect my credit rating?
Providing the borrower keeps up with their repayments your credit score won’t be affected. However, should they fail to make their payments and the loan/mortgage falls into default, it will be added to your credit report.
Will being a guarantor affect me getting a mortgage?
Helping a family member or close friend to secure their credit can affect your future mortgage applications. Mortgage lenders look at every aspect of your income and outgoings, including debts; because as a guarantor you may have to pay your friend/family member’s debt, this type of borrowing can have a negative impact when they calculate accumulated debts for affordability. You may find it stops you getting another mortgage.
What is a guarantor check?
Lenders run a series of checks before approving a guarantor loan to assess whether the borrower or guarantor will be able to repay the loan. Credit checks review your credit history and reveal your credit score, giving the lender insight on how well you’ve repaid other types of credit and loans in the past. So, as mentioned above, a guarantor with a good credit score will add credibility to your application. They also run affordability checks to gauge how much you can afford to borrow each month.
Compare guarantor mortgages and loans
If someone has asked you to be a guarantor for them, it’s a good idea to encourage them to compare options with different lenders to make sure they’re getting a good deal. If you end up having to cover the repayments, you want to make sure it’s not costing you more than it could have.