Acting as a guarantor

You should only agree to be a guarantor for a person you completely trust as you are guaranteeing that you will cover their payments if they cannot. Some banks, and especially landlords look for guarantors to ensure they get their money. Usually, the guarantor is the last person a lender approaches as they always try and sort things out with the person who took on the liability, as such, you may be blissfully unaware that there is a problem until a bailiff is at your door with a demand for the total outstanding debt, plus their fees.

 

If the borrower keeps up the repayments, then all should be well, however you need to consider that if you have to cover the debt how will it affect your relationship with them, remember the lender can treat you as if you took the loan out yourself, chasing you through the courts and possibly making you bankrupt. We would always suggest that before deciding you should fully examine exactly what the lender is taking on, for example, if they want to open a shop, they may be liable for rent for a set period of several years before they can cancel the rental agreement (known as a break clause). Even if the shop does not prosper and they abandon the idea the contract is still live and they are liable for the rent until they can legally get out of it.

We strongly suggest you calculate the maximum liability that could occur in the worst-case scenario and consider how you would cover such liability if you needed to. Reducing the maximum liability is always a good idea, in the shop example above we would suggest you go for short-term break clauses, say yearly, the shop owner or their agent will seek to strengthen their position and push for the longest term they can get.

 

Who can be a guarantor?

Anyone over 21 years old, with a good credit history and financial stability. Ideally, you should have a reasonably good credit history and be up to date with your credit commitments. It helps if you are a homeowner (more assets to chase by lenders if payments are missed) and can prove you can afford any repayments.

Before agreeing to be a guarantor you need to ask yourself:

• Why do they need a guarantor?
• Are they responsible?
• Is there another way of getting what they need without using you as a guarantor?
• Could I afford to repay the whole loan, potentially with court or bailiff fees if the lender does not pay at all?
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Suggested course of action

It is suggested that the borrower and guarantor open a joint bank account just to manage the liability, having a standing order going out to cover the liability and one coming from the borrower depositing funds into the account to cover the liability. In this way the guarantor would be able to receive statements/alerts from the bank, this will allow them to monitor the situation and step in if needed.

 

Being a guarantor for a mortgage

Some mortgage lenders may request that first-time buyers may need a guarantor, to begin with, this is more common if they have a little credit history, if all goes well after a year or two, they would have built up enough credit history to remortgage, taking the whole responsibility upon themselves, freeing off the need for a guarantor.