Guarantor loans have become prevalent in recent times as banks try to spread the liability for loans. These types of loans are usually structured in such a way that the loan is secured by both the property you are buying and the property owned by the guarantor. Here are some types of guarantees:
1. Security guarantee: First time home buyers with an excellent credit history but no deposit will use this type of guarantee. The guarantor, called an ‘equity guarantor’ by some lenders, uses real estate they own as additional security for the mortgage in question. If the guarantor has a loan on their property already, the bank can usually take a second mortgage as security.
2. Security and income guarantee: These guarantors are often parents helping their child who is a student or who has insufficient income to buy a property. The lender will use the parents’ property as additional security and rely on the parents’ income to prove that the loan is affordable.
3. Limited guarantee: The guarantor only guarantees a part of the loan. This is mostly used with security guarantors to reduce the potential liability secured on the guarantor’s property. Guarantees can either be limited or unlimited, depending on both the guarantor’s wants and the lender’s requirements.
If you use a limited guarantee, then you are reducing the guarantor’s exposure to your mortgage although you may still be up for interest and charges by the bank in excess of the limit of the loan.
Some banks require the customer to obtain independent legal advice from a solicitor. If we at Matthews Williams can help you on any legal matter, feel free to call us.