Sometimes you need a person to act as your guarantor to fetch loans from banks. In case of failure to repay the loan, the guarantor shall be accountable for fulfilling the borrower’s obligations. A guarantor is also known as a surety. Also at times, the guarantor keeps his personnel belonging as security for repayment. You must be wondering what is a parent guarantor.
In simple terms, a person who takes a guarantee from someone else for fulfilling their promise of repaying the borrowed loan amount is known as a Guarantor in financial terms. Therefore, you must know the person very well before accepting to be his/her guarantor. As this is not just a formality or requirement of the lending institute but you shall be equally liable for repayment.
So, let us begin with understanding the basics of who is a guarantor and what responsibilities are attached to it, and under what circumstances can parents act as guarantors.
A Guarantor is a person who gives a guarantee against any loan or mortgage or debt taken by someone else. The guarantor promises to repay the amount taken by the third party in case this third party fails to fulfill its commitment to repaying the amount borrowed.
It is usually a parent or relative or close family member or friend who chose to act as a guarantor. It is implausible that any person who you just met a couple of times acts as a guarantor for you.
1.1. Let Us Understand Better With the Following Example
XYZ (Borrower) has taken a loan of a certain amount from a Bank (Lender). ABC (Guarantor) has undertaken the responsibility to act as a Guarantor of XYZ (Borrower). A guarantee can be for the partial amount or the full amount.
In case XYZ (Borrower) makes a default in monthly repayments, in such a scenario the Bank (Lender) will come after ABC (Guarantor) for fulfilling the interest payment obligation on behalf of XYZ(Borrower).
1.2. Key Points
- Here the Guarantor might have to keep his property as collateral against the loan/ mortgage amount.
- The Guarantor need to enter into a Deed of Guarantee, basically, a contract that contains all the term and conditions and should be duly signed by the Guarantor.
- There is a difference between a guarantor and a co-borrower. In case the borrower and co-borrower fail to repay the amount only in that case the financial institute approaches the guarantor for recovery.
- Even your credit rating is taken into account if you are a guarantor.
- There are various types of guarantors. For instance, financial/ non-financial guarantors, personal/ corporate guarantors, mortgage guarantors, and so on.
- You are liable for legal action in case of default.
- Once you sign on as a guarantor, it’s difficult to back out. It involves consent from both parties. Also, there should be a substitute guarantor in place before you withdraw.
2. Guarantor Mortgage
When you have a guarantor mortgage, you might get a mortgage loan without keeping any sort of deposit or having a decent credit history to fetch one.
Under a guarantor mortgage, someone else’s property is kept as security for mortgage, by the mortgage lender. In case of default in mortgage repayments, the mortgage lender has the authority to sell the property kept as security.
Though mortgage guarantor should bear in mind that he does not have any ownership of the property purchased from the mortgage loan taken by the borrower.
Usually, guarantor mortgages are someone close to the borrower. Also, only some people and not everyone can be a mortgage of guarantor mortgages.
The following criteria need to be fulfilled to become a Mortgage guarantor:
- Must be an adult with a good salaried job or business. His financial condition should be strong.
- He must have paid his mortgage successfully and efficiently without defaulting. Payments for mortgages must have been made in entirety, or at least partially. For instance, he must own at least 50 % of the equity in the mortgage.
- Must preferably have a good credit history.
2.1. Advantages of Guarantor Mortgages
Following are some advantages of having a Guarantor Moratageor:
- Helps in getting a bigger loan amount as compared to what the borrower had received if he had applied alone.
- If the borrower has a bad credit history then in that case guarantor mortgagor can become his savior in obtaining the desired loan amount
2.2. Disadvantages of Guarantor Mortgages
Along with pros come cons as well, following are stated below:
- It might be difficult to find someone with strong financial backup willing to help you
- Financials might have a bad impact on the relationship between borrower and guarantor if there’s any default in repayment
- The interest rates on guarantor mortgages are usually seen to be on the higher side when compared to regular mortgages
3. What Is a Parent Guarantor?
There are typically two types of guarantors: personal guarantors and corporate guarantors. Parent guarantor comes under the category of personal guarantor.
Lately, it has been observed that property price is reaching the sky. And so buying a home has become extremely challenging. Also, people in their early stages of life do not have that kind of financial status or means to invest in property, especially housing property.
Here the parents come into the picture as they can become a guarantor for loan payments for their kids and most lending institutes demand that either parents or close relatives agree on becoming guarantors to lend money.
In layman’s language, it’s a parental guarantee given to the lending institute that in default made by their offspring, they shall be liable to fulfill their wards’ obligation.
The reason for this is that parents are usually well established with a good amount of cash deposit in the bank. Also, they can keep their property as security to avail of mortgage loans for their children.
3.1. Criteria for Parents to Become Guarantors
- Must have a property that is completely owned by them i.e. they should be homeowner or at least have the majority of equity in the property which shall be kept as security.
- Good financial footing.
- Good credit history.
- No record of default in repayment.
3.2. Key Points
- Becoming a guarantor involves huge potential risk so it is always advisable to explore options and take independent legal advice from a lawyer to safeguard the guarantor’s interest.
- It’s important to analyze and set limits, instead of giving a guarantee on the complete loan amount become a guarantor of a certain portion. This will also ensure that children don’t take undue advantage of your genuine help.
- Have an open communication with your child. As to what timeline he needs you to be guarantor. After which he can be on his own and you can take an exit route from the whole guarantor mortgage scenario.
- Unseen and uncertain circumstances cannot be avoided. Hence it’s of primary importance that your insurance is up to date. In case of any unfortunate event, you are still in a safe place.
- If possible instead of keeping your property as security, create a savings account with sufficient deposit. In this case, you are on the safer side as in the case of default this cash deposit can be used for repayment. And in case there is no default you can earn interest on the saving account.
3.3. Risks Involved
Becoming a guarantor is no small thigh. It comes with its own set of risks which are stated below:
- When a parent becomes a guarantor even his/her credit score is at risk. In case of default made by the child in mortgage repayments, the ill effect will not only be seen in the child’s credit score but also the parent’s credit score might have an impact. Because of this fetching a loan in the future might be tricky.
- Usually, parents are in the phase of retirement or some might have even retired. Putting their life-long earnings at risk might cause unfavourable circumstances in the event of default in repayment.
- In case of default, the lender might even drag the parent guarantor to court for the fulfillment of repayment obligation.
- Once you become a guarantor it’s very difficult to withdraw. Unless agreed by both borrower and lender.
- Before accepting to become a guarantor you must assess your future loan requirement. Becoming a guarantor can impact that.
4. Alternative of Becoming a Parent Guarantor
There are huge risks and liabilities involved in becoming a guarantor. Hence it should be seen as a final option. Following are the alternatives that Parents might resort to help their children:
4.1. Cash Gift
If you have sufficient cash deposit in your bank try giving your kid a portion of it, which can be used as a down payment. In this way, the mortgage loan amount might reduce considerably reduce leaving no scope for the guarantor.
4.2. Joint Borrower Sole Proprietor Mortgage (JBSP)
This is a modern concept of mortgage that is lately gaining popularity in the property market due to the advantages attached to it. As the name suggests there are two borrowers but only one shall be the sole owner of the property.
This is useful for first-time buyers who don’t have great financial stability or credit score to bag in the lumpsum amount of a mortgage loan.
The joint borrower is usually parents or guardians who want to help their children yet do not want their names on the title deed of the property.
The joint borrowers can also withdraw their names as soon as the child becomes capable of handling the loan amount alone.
Under JBSP mortgage the financials of the joint borrower is also taken into consideration making it easier to get the desired amount of loan.
4.3. Help Them in Managing Their Financials
If nothing works, you can always help them save. Instead of buying new property allow your children to reside with you for a certain period wherein they can save. Also, help them in understanding various options for investment wherein the money invested can increase gradually.
4.4. Purchase the House Yourself
If you have sufficient funds you can pay to buy the house and let your children stay there and take monthly rents from them. And once you have the property deeds and recovered the desired purchase amount transfer the property under your child’s name.
5. Frequently Asked Q&A
The following are frequently queries raised on this topic:
Can Retired Parents Take Up the Responsibility of Mortgage Guarantors?
Well, that is completely at the discretion of the Lender. Although, most of the time mortgage lenders consider retired parents as guarantors if they fulfill the criteria laid down.
Generally, these criteria are that parents should be financially sound or have sufficient income, they should own property or they have stable and regular income from pensions or they have good bank deposits.
Can Parent Guarantor be Liable for Legal Action?
Yes. As we already described in the above article. Parent guarantors are equally liable for monthly repayments of the loan. And in case of default not only the borrower but also the guarantor is liable to face legal consequences.
Can Parent Guarantor Withdraw as Mortage Guarantor?
Yes, but it’s a complex process. For withdrawing from the capacity of guarantor there needs to be mutual understanding and consent from both lender and borrower.
Also, in case of repayment of the partial loan amount the lender might accept the request of the parent guarantor to withdraw itself from the position of guarantor.
Is There Any Time Limit for the Guarantor to Stay on Mortgage?
There is no such time limit specified anywhere unless the Deed Of Guarantee has any particular clause stating the limited timeline. The guarantor can stay in the same exposition until the whole tenure is over.
To conclude what is a Parent Guarantor? It simply implies that they are the ones giving a guarantee on your child’s behalf. Parents should also analyze the potential of their child before agreeing to become a guarantor.
Becoming a guarantor for home buyers is a risky affair. There are serious implications attached to it. However, if you are confident about your right and your child’s capacity you can go ahead in supporting your child to buy his/her first home.
However, you should also be prepared for any uncertainty that the future holds. Before securing your child’s future make sure you are guarded and backed up with an alternate plan in case of any default.
Nazish is a member of ICSI (Institute of Company Secretaries of India) and also double graduate in Commerce and Law. Currently a full time mother and a homemaker trying to mark a difference through the power of pen. She is a voracious reader and has passion for writing. She has positive outlook towards life. She enjoys travelling and discovering new places.