Being a guarantor on a mortgage or a rent: what to watch out for

Many banks ask for a guarantee when granting a loan for the purchase of a house, but there are also certain landlords who ask for one in new leasing contracts. In this article from Alerta Deco (the Portuguese Consumer Protection Association) for idealista/news, we explain what’s the point of this standard procedure in the housing market and what’s at stake.

 “My child asked me to guarantee their mortgage. Can I be a guarantor? What does being a guarantor mean?"

A guarantor is a person who gives personal guarantees by way of their assets for the payment of debts in the form of a security deposit. This collateral is a special and personal guarantee of compliance with the obligations of the loan.

Anybody can serve as a guarantor, as long as it is allowed by the bank to which the mortgage was requested for the purchase of the house. It is very common to ask for a guarantor to co-sign mortgage contracts for the purchase of housing and sometimes also for rentals.

The criteria for acceptance as guarantor are very diverse and even subjective. There are banks that prefer guarantors to have relevant assets, while other financial institutions may consider it more important to have as guarantor a person who, despite not having great assets, has a high salary.

Do your research and think carefully before accepting to be a guarantor for somebody else’s mortgage loan! By guaranteeing someone, you are taking on the commitment to pay the debt if they don’t. That is to say, the bond is the contract by which the guarantor agrees to pay the debt of another, the ‘original’ debtor, if the latter does not do so.

Therefore, accepting to be a guarantor must be a balanced and informed decision regarding the obligations that are assumed. If things go wrong and your child is forced to face an unforeseen event, such as unemployment or a reduction in salary, you will have to step forward as the mortgage payer. By accepting this responsibility, your assets have been given as a guarantee of the third party's debt, being obliged, in the event of default, to the creditor to answer for the debtor's debts.

Can I stop being a guarantor?

Sometimes, people want to stop being the guarantor for a loan after a while, but as a general rule they will only be able to disassociate themselves if both the creditor and the debtor agree. It is often unlikely that the creditor, the bank issuing the mortgage, will accept the reduction of collateral.

Such cases almost always end quite dramatically, leaving the guarantor with the payment of the debt and having to ask the defaulting debtor for repayment later on. In practice, though, if the debtor failed to repay the loan directly to the banking institution, they will hardly be able to pay back the guarantor, unless their financial situation undergoes a significant change.