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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 check to take out one of their loans, just a friend or family member who has a good credit history that 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 might 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 look 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.

Evidence of this 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 said: “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, but if you fail to make any repayments that the borrower has missed, you could end up with negative markers which will lower your Credit Rating and make taking out credit more difficult.

Acting as a guarantor could create a financial association between yourself and the borrower, which means the borrower's credit history could be assessed as well as your own the next time you apply for credit.

For more help with financial associations (including how to remove them from your Credit Report), see our guide.

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 05/04/19 by Jamie Mackenzie Smith

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