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.