Acting as a mortgage guarantor

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Acting as a mortgage guarantor
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Jonnyboy

Joined: 29 Oct 2004
Posts: 23956
Location: under some rain.

Posted: Mon Jul 24, 06 11:09 am Post subject: Acting as a mortgage guarantor
I'm thinking of offering to be a guarantor for a friend who needs a small increase on their mortgage but is current living on disability due to a heart condition. (for improvements not consolidation) anyone know what the pros and cons of this sort of thing are? I haven't approached them about it yet so don't really know if it will help their application much.

tahir

Joined: 28 Oct 2004
Posts: 45434
Location: Essex

Posted: Mon Jul 24, 06 11:11 am Post subject:
I'd much rather loan them some money than be a guarantor (if that's at all possible)

jema
Downsizer Moderator

Joined: 28 Oct 2004
Posts: 28120
Location: escaped from Swindon

Posted: Mon Jul 24, 06 11:12 am Post subject:
Pros it a nice thing to do Cons - It will effect what you could borrow, and the guarantor bit means exactly what it says on the box!

Jonnyboy

Joined: 29 Oct 2004
Posts: 23956
Location: under some rain.

Posted: Mon Jul 24, 06 11:12 am Post subject:

tahir wrote:

I'd much rather loan them some money than be a guarantor (if that's at all possible)

They wouldn't take a loan.

Jonnyboy

Joined: 29 Oct 2004
Posts: 23956
Location: under some rain.

Posted: Mon Jul 24, 06 11:14 am Post subject:

jema wrote:

Pros it a nice thing to do

Cons - It will effect what you could borrow, and the guarantor bit means exactly what it says on the box!

It's only 10k on their mortgage, would i be liable for the whole mortgage or the additional borrowing?

tahir

Joined: 28 Oct 2004
Posts: 45434
Location: Essex

Posted: Mon Jul 24, 06 11:16 am Post subject:
I'd be very wary of guaranteeing anything for anyone. I've loaned money to people before on the understanding that yes it is a loan, not a gift, but making sure it was enough that I could afford to lose. With a guarantee it could potentially be excercised at any time, perhaps when you have nothing to pay the guarantor off with. Tread very very carefully.

Silas

Joined: 29 Oct 2004
Posts: 6848
Location: Staffordshire

Posted: Mon Jul 24, 06 11:16 am Post subject:
Unless they are in negative equity, the property that the mortgage is on should be sufficient security for the lender. I have never heard of a guarantor for a secured loan.

Behemoth

Joined: 01 Dec 2004
Posts: 19023
Location: Leeds

Posted: Mon Jul 24, 06 11:18 am Post subject:
The loan is on the property and the whole property is at risk if repayments are not made so I would guess that you'd have to take the full whack. I can't see a mainstream building society getting into deals to divvy up pockets of liability.

Jonnyboy

Joined: 29 Oct 2004
Posts: 23956
Location: under some rain.

Posted: Mon Jul 24, 06 11:21 am Post subject:

Silas wrote:

Unless they are in negative equity, the property that the mortgage is on should be sufficient security for the lender.

I have never heard of a guarantor for a secured loan.

Plenty of equity, the issue may be that they are on income support rather than earning.

The mortgage application form has a bit in it for guarantors signature, I was helping them with the forms and saw it, which put me in the mind to ask.

tahir

Joined: 28 Oct 2004
Posts: 45434
Location: Essex

Posted: Mon Jul 24, 06 11:23 am Post subject:

Jonnyboy wrote:

It's only 10k on their mortgage, would i be liable for the whole mortgage or the additional borrowing?

Only 10k? That's a huge amount if you're in trouble yourself. And unless you really read, reread, and read again the fine print of any loan agreement yoou're never sure what you're signing up for.

As you know I recently had to become a guarantor for an overdraft facility, after I raised an issue it ended up that I was signed up for life. It took several months of redrafted agreements before I put my name down. Banks want to own you.

Penny Outskirts

Joined: 18 Sep 2005
Posts: 23385
Location: Planet, not on the....

Posted: Mon Jul 24, 06 11:53 am Post subject:
In my expereince of such arrangements, they can very often end in tears for all concerned. Whilst it's a wonderful thing to do, I'd try to help them in other ways. Sitting the other side of the table as a bank manager, I saw some really tragic situations, which are no-ones "fault" but banks is businesslike things, and don't do compassion.

Mary-Jane

Joined: 13 Jan 2005
Posts: 18397
Location: The Fishing Strumpet is from Ceredigion in West Wales

Posted: Mon Jul 24, 06 12:04 pm Post subject:

This does not constitute legal advice – it is simply a general overview.

As a guarantor you will not be named on the mortgage deed - only the buyer is; the person assisting them is not named on the mortgage deed but instead provide a guarantee that they will be responsible for all the mortgage repayments in the event of the other person being unable to do so. While most mortgage lenders will require guarantors to be able to support the whole mortgage loan, there are some lenders who will allow the guarantor to be liable only for the excess amount.

You should consider whether your income is enough to support the whole mortgage; if not, this would probably rule out the guarantor option with most mortgage lenders. However, you should consider taking legal advice when considering acting as a guarantor (in fact, most lenders will require you to do so). Therefore the following are important factors to consider:

Advantages for guarantor:
a) Does not have an equity interest in the property and does not appear on the land registry;
b) Only an advantage if wanting an 'arms length' transaction and merely using their income to 'leverage' the income of the other party;
c) Cannot be liable for any Capital Gains Tax on disposal.

Disadvantages:
a) The guarantor does not receive statements or communications from the lender - therefore if the situation deteriorates, e.g. your friend stops paying the mortgage - you will not know until their guarantee is called in;
b) You still have to declare the amount you are guaranteeing (usually the whole mortgage) if you apply for a personal mortgage on your own behalf and it will be treated as if the loan were actually yours i.e. it will be deducted from the amount you can borrow based on your income;
c) You do not have an equity interest in the property unless specified elsewhere;
d) You will usually have to get a signed statement from your legal adviser saying you fully understand the commitment you are taking on - which you will have to pay for.

While there is an exception to this rule (see below), as most lenders require guarantors to be able to support the whole mortgage, this means that the guarantor's salary may have to be substantial, particularly if they have another existing mortgage to deduct.

The mortgage company will insist that you get advice because it wants to be sure that you have understood that if your friend fails to pay the mortgage, you will be liable to pay the full amount together with any charges that may become due.
This is so that you cannot later say that you did not know what was involved. So although insisting that you get legal advice protects the lender, it is also in your best interests to get independent legal advice on what you are letting yourself in for by becoming a guarantor.

However, if you are happy with the risks and feel comfortable with the commitment you are about to take on, and you really do not want to pay for legal advice, the mortgage company might be prepared to accept a signed declaration stating that you refused to take independent legal advice.

Hope this helps...

marigold

Joined: 02 Sep 2005
Posts: 12458
Location: West Sussex

Posted: Mon Jul 24, 06 12:13 pm Post subject:

I'd advise extreme caution. If your friend is on benefits, how do they propose paying for the increase anyway? What would happen if they defaulted? When you have health problems there's a tendency to be over-optimistic about how quickly you will recover and get back to mormal earning capacity.

A friend of mine acted as guarantor for her (then) boyfriend's business loan - when his business went belly-up she found herself liable to pay the debt and the boyfriend she thought she could trust disappeared with a "that's your problem darlin'" attitude. After much hassle she negotiated to pay "only" the capital. Your friend is hopefully much more trustworthy, but as Penny says it can all go horribly wrong.

If you can afford to lend your friend the money (and are willing to take the loss if they can't repay), then that would be a fantastic gesture, but be very, very wary about acting as guarantor on a mortgage or any kind of loan.

You are definitely doing the right thing to be making enquiries before signing on the bottom line!!

Jonnyboy

Joined: 29 Oct 2004
Posts: 23956
Location: under some rain.

Posted: Mon Jul 24, 06 12:55 pm Post subject:

tahir wrote:

Only 10k? That's a huge amount if you're in trouble yourself. And unless you really read, reread, and read again the fine print of any loan agreement yoou're never sure what you're signing up for.

In the grand scheme of things it is, the current mortgage is £50k on a £285k house which they have no problems paying, and have never had problems paying. The increase in payments would be £60 a month.

Without going into the circumstances there are at least half a dozen family members which would help them out financially if required, so although it's based on trust I'm not at all worried about being saddled with repayments.

What I want to do is help ensure that they get a loan from a reputable high street company, and don't end up in the arms of the low lifes who rip of those who don't fall under the standard criteria.

Thanks for all the advice, hopefully It won't be required at all.

marigold

Joined: 02 Sep 2005
Posts: 12458
Location: West Sussex

Posted: Mon Jul 24, 06 1:23 pm Post subject:
It may be relevant to mention that if your friend's only income is from means-tested benefits, I don't think the DWP will pay the interest on a further advance.

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