What is a guarantor and how do they work?

It’s no secret that millennials are less likely than previous generations to be able to buy their own home. A combination of high property prices and higher rents has made it more difficult for many first-time buyers to save for a deposit and then get a mortgage. One avenue for potential buyers is to use a guarantor, which can also be an option for someone looking to rent. Below, we explain what ‘guarantor’ and ‘guarantor mortgage’ mean, and how someone might use them.

What is a guarantor and when might you need one?

A guarantor is an individual who assumes liability for credit on behalf of another person. Essentially the guarantor agrees to take responsibility for repayments in the event that the borrower can no longer afford to make them. If the borrower repays the loan with no issues, then the guarantor will not owe any money or have to take action.

There are different reasons someone might need a guarantor, and guarantors can be used for many different types of loan. If you are looking to rent a property for the first time, perhaps because you’re a student or leaving home, you might be asked to provide a guarantor. Landlords want to be sure that they will get their rent, and with students more likely to change properties, insisting on a guarantor is one way of adding security.

If someone has a poor or limited credit history they might struggle to get products like personal loans or car finance, because lenders are wary of a history of missed payments or defaults. Some lenders, however, will offer credit to people who have a guarantor, provided of course that the guarantor has a good credit history themselves.

Guarantor mortgages work in a similar way, if someone cannot raise a big enough deposit or does not earn enough, they can use a guarantor to accept some or all of the liability.

Who can be guarantors?

Accepting the responsibility of repaying someone else’s debt is not something to take lightly, so typically a guarantor will be a relative, a close family friend or someone else with whom the borrower has a strong relationship. Legally anyone can be a guarantor – they don’t necessarily have to be someone related by blood but they do have to be at least 18 or 21 years old depending on agreement clauses.

Although there aren’t many technical restrictions on who can be a guarantor, in practice lenders will be looking for a guarantor to fulfil specific requirements. They would need to be a UK resident, so that a lender can pursue legal action if necessary and ideally need to be a homeowner. They would also need to be able to demonstrate a good credit history and have the ability to pay the rent or mortgage repayments on behalf of the borrower. This means they would need to have sufficient income or assets to cover the debt.

Becoming a guarantor is a serious responsibility and if the borrower did default on their loan, it may affect the guarantor’s credit history and their chances of getting access to credit in the future. That is why it is important for both parties to understand their responsibilities and ensure that both can make repayments if needed.

What are the rights and responsibilities of guarantors?

A guarantor has no claim to the property which is being rented or purchased, unless there are specific stipulations in the agreement. They are responsible for paying debts on behalf of the borrower should the need arise, this concept is known as ‘surety’. Once a guarantor agreement is made, it will be enforced until the end of the agreed period of repayment.

One aspect that guarantors should be aware of is something known as ‘joint liability’, which may apply in situations where multiple parties enter into a financial agreement. You can read more in this article about joint liability, but ultimately a guarantor may be held liable for the debts of all parties. So if a parent acts as a guarantor for a son or daughter renting accommodation with other students, they could potentially be liable for the rent of all parties.

Generally, a guarantor agreement would only show up on the credit history of the guarantor in the event of a missed payment or default. If the loan is paid on-time and in full, then it will not be reflected in their credit report. However, you should always check the specific terms and conditions of the guarantor agreement in case they differ from the guidance above.

If you are interested in checking details of your credit history, you can get online access to your credit report with your Equifax Credit Report & Score, which is free for 30 days and £14.95 a month thereafter.