Guarantor loans can affect mortgage applications, lenders warn

Posted by Kelly Luff in Mortgages on 9 January 2018 - Kelly is a Marketing Executive at checkmyfile

Guarantor lenders are always keen to point out that you don’t need a credit report check to get their loan, just a friend or family member who has a good credit history and is able to act as a guarantor. For those with a poor credit rating, this type of loan provides a solution to a problem – they can afford the loan repayments but are unable to get credit due to prior adverse credit history.

But what about the guarantor themselves? You would assume that the greatest risk to the person putting their name forward as the payee in the event of missed payments would be potentially having to foot the bill, but there’s more to it than that.

How it affects the guarantor’s affordability

Mortgage brokers are now being urged to raise the issue of being a guarantor with their clients. As mortgage lending is now much more tightly managed, lenders are looking at every aspect of a customer’s income and outgoings, including debts. Increasingly this includes others’ debts that the applicant is a named guarantor on, which gets factored into their accumulated debts for affordability.

That means that if the guarantor has applied for a loan, the lender will look at whether they will be able to make the payments on top of the loan they are a named guarantor on, should they have to start covering those payments. Even if there’s little chance of payments being missed by the borrower of the guarantor loan, this can have a big impact when applying for a mortgage or any other sizeable loan.

Does being a rent guarantor count?

Acting as a rent guarantor is a common way to help people that may not have a history of previous landlords to use as references to show when looking for somewhere new to rent. Much like a guarantor loan, if the borrower/tenant cannot pay on time, you will be liable for the amount due.

However, evidence of the agreement is unlikely to appear on your credit report but it may still fall under your credit obligations, so if asked by a potential lender you are legally required to disclose this.

What are the risks?

Citizens Advice have warned that this type of loan is just as damaging as a payday loan, after the charity found that 43% of those acting as guarantors had no idea of their actual responsibilities towards the debt. In 2016, 2,000 people contacted Citizens Advice with problems related to guarantor loans, with many people unaware that a guarantor loan actually means that by agreeing, they were liable for any missed payments.

The guarantor is often not included in the advice process and there is little in the way of regulation that requires the lender to give the guarantor a full explanation on their rights, duties and the implications the debt can have on their own borrowing.

Ray Boulger of John Charcol says, “Friends or relatives may generously agree to being a guarantor, believing it will not cost them anything in real terms unless the borrower defaults. However, it could prove expensive if it means they no longer pass lenders’ affordability tests. It might even cost them a mortgage. If they cannot remortgage on to a cheaper deal because of the agreement they could end up as mortgage prisoners stuck on the standard variable rate.”

The industry for this type of loan is growing business as more and more types of guarantor loan become available. The amount borrowed is typically between £1,000 and £7,500 at interest rates as high as 49%.

Your rights as a guarantor

As a guarantor, you have a certain number of rights that will protect you or help you reclaim your money should the borrower default on payments. Before agreeing to become a guarantor, the lender must make sure that making the borrower’s repayments on their behalf would not significantly financially burden you. You are also entitled to a copy of the original loan agreement, which will be useful should you need to refer to the terms at any point.

Should the borrower default on payments, you are granted the right to sue the borrower to reclaim any missed payments that you have had to cover.

How does being a guarantor affect my credit rating?

The act of being a guarantor shouldn’t appear on your credit report, so for the most part it will go unnoticed when you check your file. The only affect this may have on your rating and score is if you fail to make any repayments that the borrower has missed, which would then be treated the same way as if you had taken out the loan yourself and missed payments, leading to default markers on your report.

Acting as a guarantor will not create a financial association between you and the borrower, however taking out a joint loan or mortgage would.

You can make sure you have the best chance of being approved for a mortgage by checking your credit report before you apply, so you can see what lenders see. If you're not already a member, you can sign up to checkmyfile FREE for 30 days and then for just £14.99 a month, which you can cancel anytime.

Updated 09/01/18 by Jamie Mackenzie Smith

How your credit file could help you get a good mortgage deal

How to use your credit report to get a great mortgage deal in 2019

There have been plenty of reasons to get people thinking about making that first leap onto the property ladder in recent months, including Help to Buy schemes, the removal of stamp duty charges for about 95% of first time buyers and an increase in affordable houses being built.

Published on 20 Nov 2018 by Kiah Phillips

Full Article

Why Mortgages Might Be Agreed In Principle Then Declined

Getting your mortgage Agreed in Principle (also known as a Decision in Principle or AIP) is an important step towards finally getting into a new home, but the relief of getting an AIP can be short-lived if you then get turned down when applying for the actual mortgage.

Published on 29 Oct 2018 by Jamie Mackenzie Smith

Full Article

Am I More Likely to Get a Professional Mortgage?

Before the Credit Crunch of 10 years ago, finding a mortgage valued up to 95% or even 100% LTV and at more than five times your salary level wasn’t difficult - in fact it’s since become clear that it was too easy and was a financial disaster waiting to happen. As such, mortgages have become harder to get accepted for then, with stricter regulations coming into place ensuring that mortgages are only granted to those who can truly afford them.

Published on 14 Sep 2018 by Jamie Mackenzie Smith

Full Article

The best credit score for a mortgage

A lot of customers come to checkmyfile because they plan on applying for a mortgage – your Credit Report is, after all, the best place to start as it’s helpful on more than one occasion. But often the question is often raised: "what Credit Score will I need to get a mortgage for my dream home?”

Published on 8 Aug 2018 by Jamie Mackenzie Smith

Full Article

Last minute mortgage checks

When could a non-bankrupt person be considered bankrupt? When they’re buying a house.

Published on 17 Jan 2018 by Richard Catlin

Full Article

Homeownership among 25 year olds halved in 20 years

Homeownership among 25 year olds has more than halved in the last 20 years, according to a survey conducted for the Local Government Association (LGA). The study carried out by Savilles the estate agents found that only 20% of 25 year olds now own a home of their own, compared to 46% in 1996.

Published on 5 Jan 2017 by Erika Bone

Full Article

Housing Values Rise to 5.6 trillion

While housing prices have displayed a consistent rise over the past several years, according to a recent study conducted by Halifax, the total value of privately owned housing in the UK has exceeded £5.5 trillion for the first time.

Published on 14 Dec 2016 by Tom Magor

Full Article

First-time lenders can borrow against parent's home

In recent decades, the “bank of mum and dad” has increasingly become a cardinal resource for their offspring achieving independence and for first-time buyers attaining a foot on that all-important first rung of the property ladder.

Published on 9 Dec 2016 by Erika Bone

Full Article

Buy to let slows as mortgage rate offers begin to increase

In the last few years we have not only seen some historically low mortgage rates, but also a rush to make property investments. Now the tide may finally be turning, as lenders begin to increase their lowest mortgage rates, and buy-to-let figures drop in the wake of new regulations.

Published on 7 Dec 2016 by Kelly Luff

Full Article

Mortgage costs reach record low

The cost of obtaining a mortgage could be in reach for first-time buyers, as rates drop to a record low.

Published on 16 Nov 2016 by Simon Hadley

Full Article


We are rated number 1 for customer service on