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Borrowers could ruin mortgage chances by acting as guarantors

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Borrowers risk damaging their chances of getting a mortgage by offering to act as a guarantor on small loans for friends or relatives.

Brokers are being urged to raise the issue with clients, as existing borrowers could even make themselves mortgage prisoners if they agree to guarantee a relative’s loan without understanding the impact on their own affordability.

The alert comes after Citizens Advice warned that guarantor loans have the potential to be “just as damaging” as payday loans.

The national charity is not referring to guarantor mortgages, which are frequently used by families to help first-time buyers on to the housing ladder. Rather, it is concerned about a growing trend for guarantor loans aimed at borrowers with poor credit histories. They typically range between £1,000 and £7,500 and have average interest rates of 46.3 per cent.

While the regulator has clamped down on payday lenders, these loans fall outside of the definition of high cost credit, even though Citizens Advice believes “they can be just as dangerous”. It found that 43 per cent of guarantors who sought help from the charity were unsure of the extent of their responsibilities. Guarantors can still be liable to pay off a debt even after the borrower has died.

The guarantor loan market is now worth £154m and more than 50,000 people took out this type of loan in 2013 (the latest year for which good data is available). Figures show the largest lender’s turnover grew by 30 per cent and its profit by 40 per cent between 2013 and 2014.

Citizens Advice fears preventative action by the FCA over this area of the market may come too late for many people.

Gillian Guy, chief executive of Citizens Advice, said last week: “Friends and relatives are unknowingly signing up to mountains of debt. Guarantor loans carry with them huge risks and our evidence shows people are getting involved without being fully aware of the dangers.”

With a guarantor mortgage, MMR requirements mean the relative offering to guarantee the debt is included in the advice process. But friends and family who guarantee smaller personal loans may not be told how this could affect their own borrowing chances.

Ray Boulger, senior technical manager at John Charcol, says: “Friends or relatives may generously agree to being a guarantor, believing it will not cost them anything in real terms unless the borrower defaults. However, it could prove expensive if it means they no longer pass lenders’ affordability tests. It might even cost them a mortgage. If they cannot remortgage on to a cheaper deal because of the agreement they could end up as mortgage prisoners stuck on the standard variable rate.”

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