Being a Guarantor for Your Child: When Not to Sign!

If your child is going off to university, or moving out of the family home, they may be renting a property that requires a guarantor. In the worst case scenario, this may mean that you end up paying the rent in event of default, as well as for any damage incurred during the tenancy. However, these sums are small in comparison to the money that you could become liable for if you agree to guarantee your child’s mortgage. Some lenders are likely to agree to this arrangement if you can show that you are able to afford the repayments. Therefore a mortgage application will be considered on the merits of your income, rather than the income of your child.

Mortgage Applications

In the UK not all mortgage lenders accept mortgage guarantors, so you may not be able to get the best rate available if your child was able to obtain the mortgage without your assistance. The banks that do - currently include C & G and Halifax, which both insist on you being a blood relative. This means that you may not be able to guarantee the mortgage if it is for your partner’s child, for example. In practical terms, the property will be in your child’s name but if they default on a mortgage payment you will be asked to pay up.

Deposit versus Guarantee

Everyone’s circumstances are different so if in doubt about guaranteeing a mortgage debt you should always seek independent financial advice. If your child does not have enough for the deposit, but is able to show that they can afford the repayments, you may wish to consider paying the deposit instead – either by way of a gift or a loan. That way, if your child defaults on their mortgage (which of course, they know not to!) you don’t risk your own creditworthiness in the future – because if you need to apply for finance in the future you wouldn’t have to factor in the risk of having to meet every repayment. A larger deposit not only often secures a lower interest rate, but also reduces the repayments so they are more affordable for your child.

Re-Mortgaging

If capital is an issue, some parents choose to remortgage their own home in order to help their children onto the property ladder. This can work well if your child agrees to pay you interest back to help cover the repayments on the re-mortgage.

When To Think Twice

You should exercise extreme caution if you intend to guarantee a property that your child is buying with another person, for example with a boyfriend or girlfriend, or a friend. Property transactions can start off with the best of intentions but if a relationship breaks down, or someone moves out, you can find yourself having to pay out rather more than you anticipated.

Guarantees Are Infinite

Parents who agree to guarantee their children’s mortgage should be aware that the guarantee is infinite. In other words, you remain a guarantee for the entirety of the mortgage unless and until your child can show that they are able to take on the full mortgage debt themselves.