A guarantor might be considered when the borrower’s financial position does not fully satisfy a mortgage provider’s lending criteria. Where this is the case, the lender may consider taking a personal guarantee to support the mortgage.
The guarantor is not a party to the mortgage but some lenders may ask the guarantor to sign the mortgage deed.
A guarantor enters into a separate contract to undertake to repay the mortgage if the borrower fails to do so. Because the guarantor is entering into a collateral contract and is not a party to the mortgage transaction itself, there are no provisions in the Mortgage Conduct of Business rules relating to personal guarantees.
Types of Guarantee
There are two types of mortgage guarantee:
Supported Mortgage Guarantee
A supported mortgage guarantee requires an individual to offer security to the lender. This type of guarantee is known as a surety.
Unsupported Mortgage Guarantee
An unsupported mortgage guarantee merely requires an individual to provide a promise to the lender to pay; no security is needed.
Lenders may often require guarantees from directors when loans are made to limited companies. The reason for this is that limited companies are considered to be a separate legal entity to the directors and, if the company is unable to meet its obligations, the lender can therefore rely on the personal guarantee of the director/s.
It is prudent for prospective guarantors to seek independent legal advice before committing themselves to a personal guarantee because they have undertaken to commit collateral into a contract – but they are not a party to the mortgage transaction itself.
Equity Of Redemption
The term ‘equity of redemption’ is an important right for anyone who takes out a loan.
What does Equity Of Redemption mean?
Equity Of Redemption confers the legal to redeem mortgage loan at any time, irrespective of any clauses contained in the contract that might say otherwise. This right applies to anyone with a mortgage or any other type of loan, and has been confirmed by common law.
Why is this right important?
Equity Of Redemption is important to anyone with a mortgage because the majority of mortgages are paid off before the end of the term; homeowners often move home to a larger house and need another mortgage, or downsize to a smaller house whereby they can pay off their mortgage. These activities may take place several times in a person’s life.
Mortgage Redemption Conditions
Mortgage products have become increasingly sophisticated and complex in order to satisfy the ever-changing requirements of the mortgage marketplace and, just as the borrower has a right to repay at any time, the lender also has a right to impose reasonable fees and charges. It is therefore common for lenders to include conditions of redemption in their mortgage deeds such as early repayment charges (which are a feature of in fixed interest rate products)
The Mortgages and Home Finance: Conduct of Business sourcebook rules require lenders to be clear about any fees and charges that may be imposed by including them in the key features illustration for all types of regulated mortgage contract. It is incumbent on lenders to ensure that prospective customers are clearly alerted to any potential charges.
Were a lender to include a condition in the mortgage that would make early repayment difficult, this condition would be disregarded in a court of law as it would be construed as an act to prevent equity of redemption.