Should you be a guarantor for a mortgage?

What does being a guarantor mean and how does it affect you?

A guarantor mortgage is one of the ways you can help someone else get a mortgage. You do this by taking partial responsibility for their mortgage. For example, a parent might act as a guarantor for their child's first mortgage, guaranteeing a portion or the entirety of the loan.

This arrangement gives the lender more confidence and can help the borrower secure a larger loan or get approved when they might not otherwise qualify on their own.

However, being a guarantor for a mortgage is a serious financial commitment that shouldn't be taken lightly.

What are the risks of being a guarantor?

The most significant risk is that you become legally responsible for the debt. If the borrower defaults on their payments, the lender can and will pursue you for the full amount.

In the worst-case scenario, this could lead to a court order or even the repossession of your own home to cover the debt.

Acting as a guarantor is a big financial decision, a qualified mortgage 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.

Does being a guarantor affect your credit?

If the borrower makes all their payments on time and the mortgage is managed correctly, your role as guarantor will not appear on your credit report. It will not impact your credit score or your ability to get credit yourself.

However, if the borrower misses payments and the mortgage falls into default, the lender will report this. The missed payments and any resulting court judgments could be added to your credit report, which would significantly damage your credit rating.

How long do you have to be a guarantor?

Being a guarantor is a long-term commitment. In most cases, you remain liable for as long as the mortgage agreement is in place. You should weigh up whether you can handle the financial burden for the entire loan term, which can be decades.

You may be able to be released from the agreement if the borrower remortgages the property after building up enough equity, but this isn't always an option. If property values drop or the borrower's financial situation doesn't improve, you could be stuck as the guarantor for many years.

Will being a guarantor cost you money?

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.

Alternatives to a guarantor mortgage

Before you commit to a guarantor mortgage, explore other ways to help a family member or friend. Some lenders offer alternative first-time buyer schemes. These might include:

• Deposit as security: You can use your savings as a security deposit for a set period. This boosts the borrower's deposit and provides the lender with extra security without you guaranteeing the full loan.

• Joint mortgage: You could consider a joint mortgage, where you are a co-owner of the property, but this also comes with legal and financial obligations.

Should you consider Income Protection Insurance?

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. Our broker partner, Mojo Mortgages, offer income protection insurance.

The final word: Is being a guarantor for you?

Before you sign any documents, ask yourself these crucial questions:

• Could you realistically afford the monthly mortgage payments if the borrower defaults?

• Do you trust the borrower to manage their finances responsibly?

• Are you prepared for the potential impact on your own financial future and credit rating?

Being a guarantor is a serious and binding legal contract. It's not a decision to be made lightly. Consider getting independent financial advice from an FCA-authorized advisor to fully understand the legal and financial obligations before you commit.