Being a guarantor basically means that you use the equity in your own property as additional security for the borrowers loan. The primary security for the loan will be the borrowers property but, by becoming a guarantor, the lender will also take a mortgage over your property for the required amount.
It’s a suitable option for potential homebuyers who are unable to come up with a deposit, but do have the ability to make the required loan repayments. Depending on the Loan to Value ration, having a guarantor may also prevent the borrower having to pay Lenders Mortgage Insurance (LMI).
So what happens if you’ve acted as a guarantor for someone and your circumstances change? Eg. you wish to sell the secured property or apply for another loan for an investment property.
There are ways and means of releasing guarantors and the process is a relatively simple one that will involve submitting an application to release the guarantor, along with a valuation on the primary property involved. If the primary property has grown in value to the point where it has enough equity to cover the guarantors original amount, then there should be no problems with releasing the guarantor.
The time frame to achieve this can vary depending on: the original deposit saved, the number of extra repayments made and whether or not the property has appreciated in value over the time period. Depending on the lender, the borrower may also be required to pay some additional fees at the time of a request to release the guarantor. This can include a fee for the lender to revalue the primary security property as well as lender discharge fees.
If there is insufficient equity in the primary property but the guarantor is still desperate to be released, you could possibly look at options to ‘swap’ to another guarantor if you had that option available to you. This would mean going through the application process from the beginning to ensure that the new guarantor ticked all the boxes for the lender.
Becoming a guarantor is a serious and binding commitment and should not be entered into lightly. Anyone who is considering being a guarantor for a property loan is advised to seek independent legal and financial advice before accepting the role of guarantor. Most lenders will insist on this, prior to accepting a guarantee. It is important to note that a guarantor’s ability to borrow will be reduced after they have agreed to act as a guarantor.
If you still want to help your children or relatives secure a home but don’t want to take on the contractual obligations of becoming a guarantor, you could consider the following alternatives:
- Give a gift towards the deposit
- Lend the money (via a formal or informal loan agreement)
- Buy the property yourself as an investment property
- Buy the property together (similar to a guarantor)
If you’re either considering becoming a guarantor or wanting to be released as one, get in touch - one of our brokers would be more than happy to have an obligation free discussion with you to explain the process and the options avaiable to you.
* All lending subject to status and lenders criteria. Terms & conditions apply. This document contains general information only. Your own personal circumstances have not been considered and you should seek independent financial advice prior to making any decision on a financial product.