Many lenders allow a family member to help you to buy your own home by providing additional security. The person providing this assistance is known as a guarantor. This is different to being a co-applicant or co-signer.
A co-applicant is included on the loan and will be responsible for the entire loan until it’s repaid in full.
A guarantor, on the other hand, is linked to a loan by a guarantee. This guarantee can be released and the guarantor’s responsibility stopped without the loan being repaid in full. To use a guarantor, you must be able to service the entire loan on your income.
How does it work?
A guarantor allows the equity in his or her own property to be used as additional security for your loan. The primary security for the loan will be your property, but the lender will also take a mortgage over your guarantor’s property. This mortgage will not support the loan directly but will be used to support a guarantee from your guarantor.
Who can be a guarantor?
Guarantors are generally limited to immediate family members. Normally, this would be a parent but guarantors can include siblings and grandparents. Some lenders will allow extended family members and even ex-spouses to be a guarantor to a loan, but this varies depending on the lender.
What are the implications for the guarantor if the borrower cannot pay back the loan?
If you’re unable to pay back the loan according to the terms of your contract, the lender can take legal action against you, and in some circumstances, your guarantor. Your guarantor will be liable for the amount specified in the guarantee. Anyone who is considering being a guarantor for a property loan should seek independent legal and financial advice before accepting the role. Most lenders will insist on this, prior to accepting a guarantee.
It is important to note that a guarantor’s ability to borrow will be reduced after they have agreed to act as a guarantor.