What Are The Risks Of Being A Guarantor on My Child’s Mortgage?

If you are considering becoming a guarantor on a mortgage for your child, it is important to take the time you need to understand the risks of such an arrangement, e.g. potential harm to your credit rating and the fact that your home will be used as collateral. In the current economic climate, with house prices now around £270,000, more and more young people are reliant on their parent’s willingness to act as guarantors in order to secure a mortgage offer from a bank or building society, especially first-time buyers. The subject of mortgage guarantors is different from the government-backed mortgage guarantee scheme. The focus of this article is what is meant by a mortgage ‘guarantor’ and the main risks of acting as a guarantor on a child’s mortgage. 

What is a mortgage guarantor?

As a mortgage guarantor for your child, you are entering into an agreement with a lender that you will act to cover any overdue repayments owed by the main mortgage holder. As such, a guarantor gives the lender the reassurance that should the main mortgage holder be unable to pay their mortgage, you will step in as a backup. A person may need a guarantor if they do not qualify for a mortgage in their own right, perhaps because their income is too low, they have a poor credit rating, or they do not have enough money to put down as a deposit. It is not just parents who act in the role of a guarantor; it may also be a friend, relative, or anyone else who is willing to cover any payments due as long as they have a long-term relationship with the borrower. Guarantors can also be added to existing mortgages when remortgaging or changing borrowers if the financial situation of the main mortgage holder has changed.

To qualify, most banks and building societies require mortgage guarantors in the UK to:

• Reside in the UK 
• Be over 21 years old and under the age of 75 throughout the full term of the mortgage. 
• Be a close family member or a person with whom the lender has a close, long-term relationship
• Receives sufficient income to cover any repayments if needed, and
• Receive their income paid into a UK bank account.

Lenders may also require that guarantors have fully repaid their own mortgage or at least have a large equity interest in their own home. 

What are the main risks of acting as a guarantor for a child?

Becoming a guarantor for your son or daughter’s mortgage should not be taken lightly. While most parents naturally want to help their children in every way they can, acting as a guarantee has important legal and financial implications that you should be aware of before you proceed. The main risk of acting as a guarantor on a mortgage for a child is that you are personally liable if your child cannot pay their mortgage. Because you are using your own assets as security for your child, your home is at risk if you cannot cover any repayments when you are required to do so. This may not be an issue now, but if your circumstances change (e.g. you lose your job), there is potential for you to be financially exposed if you are required to cover any repayments. 

Another consideration is that your savings may be diminished. Some lenders are extremely cautious and require guarantors to deposit a certain amount of money into a savings account so that if repayments need to be covered, the money is there ready to be used. Depending on the lending criteria of the lender, the guarantor may need to have anywhere between 5% and 20% of the value of the property for this purpose.

It is important to remember that being a guarantor is potentially a very long-term commitment. If your child takes out a 25, 30, or 35 year mortgage, you are liable to cover any shortfall for this duration. You will only be released from your commitment as a guarantor when the mortgage has been repaid unless your child enters into a new mortgage agreement in the future that does not require you to be a guarantor. This means that if you were planning to retire within this timescale, you may find yourself having to work longer if your child cannot cover their repayments. 

Final words

Before you sign on the ‘dotted line’ as a guarantor, always get independent legal advice from a property law Solicitor. Your Solicitor will explain the legal and financial implications of being a guarantor, explain your options, and advise what you can do to protect your interests. Indeed, a lender will generally refuse to add you as a guarantor on your child’s mortgage if you do not have proof that you have sought suitable legal advice. 

To instruct one of our Property Law Solicitors, please fill in our contact form or email us at [email protected]