“I’ve just been asked to sign a guarantee for a mortgage, what does that mean?”
A guarantee is a legal promise or assurance made by one party (the guarantor) to another party (the beneficiary) that a particular obligation or debt will be fulfilled. Essentially, a guarantee is a form of security that provides the bank or lender with some level of protection in case the person responsible for the obligation or debt is unable or unwilling to fulfill it.
It’s not easy to get a mortgage, and some people may require a guarantor to meet the mortgage requirements. A guarantor is a person (i.e. you in this situation) who takes full responsibility for the mortgage if the borrower is unable to make payments. While serving as a guarantor can help your loved ones get a mortgage, it’s important to understand and evaluate the risks associated with being a guarantor. Before signing any papers, it’s essential to consider the worst-case scenario and what it might mean for your finances. In this blog post, we’ll discuss what it means to be a guarantor and explore the risks you may encounter.
1. Guarantor Risk Types and Relations
A guarantor takes full responsibility for a borrower’s mortgage if the borrower is unable to meet their payments. However, being a guarantor entails some risks, so it is important to consider these risks before being a guarantor. First, assess your relationship with the borrower. A guarantor’s risk varies depending on their relationship with the borrower. If the guarantor is the borrower’s parent, there might be a higher risk of involvement. Lenders may assume that parents are duty-bound to keep their children afloat financially. On the other hand, if the relationship is more distant (e.g., a co-worker or a friend), the risk may be moderate. In either case, it’s important to know the borrower’s financial situation before agreeing to be a guarantor.
2. Financial Risks
Apart from considering the borrower’s financial situation, it’s important to assess your financial position before becoming a guarantor. Make sure you can afford to meet the payments if the borrower defaults. Being a guarantor means you are legally responsible for the borrower’s debts, which may cause financial problems if you do not prepare in advance. You also risk damaging your credit score if the borrower misses payments, affecting your credit score. The credit reference agencies will link your financial details with the borrowers’. This may even prevent you from getting a mortgage, as lenders may see you are committed to someone else’s loan.
3. The Benefits of Being a Guarantor
Being a guarantor may have some benefits, particularly if the borrower meets their mortgage payments regularly. Acting as a guarantor helps build trust among people in your life, mainly if they rely on your support and guidance. Furthermore, the borrower can get mortgage access they wouldn’t have otherwise had, such as renting a home, buying a property, or paying for college. It can also help you prepare for potential financial responsibilities, such as helping your children, a family member or even a friend.
4. Legal Advice
Before signing any document, it’s important to seek legal advice. Legal advice helps identify and avoid any financial pitfalls associated with being a guarantor. These precautions include reviewing any legal documents and contracts, contacting the legal advice helpline to discuss the impact of the guarantor arrangement, assessing the risks to your credit score and budget, and ensuring that you understand the legal rights and responsibilities that you’ll have as a guarantor.
Becoming a guarantor for someone’s mortgage is a massive responsibility. It’s important to understand the risks, benefits and seek legal advice before signing any papers. Assess your financial position and ensure you can afford to take on someone’s mortgage payments before committing. Additionally, consider your relationship with the borrower, as this could impact your legal responsibilities. Ultimately, being a guarantor can be a rewarding experience. It can be a significant way to help someone closest to you, but it’s also important to remember that being a guarantor comes with financial risks and legal obligations. When in doubt, seek advice from a trusted financial advisor.
Need more clarification before signing anything on the dotted line? Reach out to us for assistance and advice and we would be happy to help!
