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.
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.
Almost anyone can be a guarantor. It’s often a parent or spouse (as long as you have separate bank accounts), but sometimes a friend or relative. 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. If the borrower doesn’t repay the loan you will be legally responsible for paying the debt. Apart from the financial burden, these situations can sometimes end friendships or cause family feuds. Both the borrower and the guarantor should think seriously about whether they can commit to maintaining the payments.
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.
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.
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.
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.
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.
There’s no magic credit score number that will guarantee you’ll be accepted as a guarantor. Each lender will have their own lending requirements. The main thing the lender wants to know is, can you afford to pay back the loan if the borrower can’t? That’s why some lenders prefer guarantors who are homeowners with full-time jobs.
But as a rule, the higher your score, the better. To find out more, see our guide on what makes a ‘good’ credit score.
Before you become a guarantor, the lender will carry out a credit check on you. However, this is normally a ‘soft’ credit search. Soft credit searches aren’t visible to other companies and won’t affect your credit score.
If the borrower keeps up their repayments your credit score won’t be affected. But if you have to cover any of the borrower’s repayments, or the loan/mortgage falls into default (leaving you responsible for all outstanding payments), this will be added to your credit report. If you fail to repay the money owed, your credit rating will be affected.
The act of becoming a guarantor doesn’t, by itself, normally appear on your credit report. But there are ways being a guarantor could affect your report:
If the borrower can’t make their repayments, the responsibility for paying them will fall on you – and this will form part of your credit record.
Becoming a guarantor may create a financial association between you and the borrower. Any financial associations will appear on your credit report, and companies may check their credit history when deciding whether to approve you.
It’s important to remember that guarantor agreements can vary from lender to lender. Check the terms carefully. If you’re still unsure about anything or how it could affect your credit report, speak to the lender before agreeing to anything.
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.
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.
There’s no set figure for this – the lender just needs to be satisfied that you have the ability to cover the repayments on behalf of the borrower. Some lenders may ask for proof that you earn over a certain amount or have sufficient savings or assets (such as a property) to cover the loan repayment.
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.