Loans that require a guarantor are becoming increasingly popular but there are significant pitfalls, writes Aine Flynn.

Guaranteeing part of your children's mortgage may be the only way you can help them to buy a home, but it is not without its dangers. Mortgage guarantees were virtually an unknown phenomenon a few years ago, but now some 45 per cent of first-time buyers rely on parental or third party assistance.

According to Ms Olive Moran, marketing manager with Bank of Ireland Mortgages, house loans that require a guarantor are becoming "increasingly popular" with sole borrowers finding it "difficult to buy on their own" in the current climate.

But guaranteeing a mortgage carries a weighty responsibility. You are not just certifying the borrower's ability to repay the debt but are, in fact, pledging your repayment services if the borrower defaults.

Mr James Frisby, mortgage consultant with Friendly Mortgages stresses the importance of affordability among guarantors and says the first question they should ask themselves is whether they can bear the burden of the worst-case scenario.

"We recommend that people are extremely careful before committing themselves. From a lender's point of view the guarantor is just as liable as the principal borrower," he says. "There are many people that have had their credit history destroyed because they have taken on too much risk."

According to Mr Seamus Ó Tighearnaigh, chief executive of the Irish Credit Bureau (ICB), the black mark on the guarantor's credit rating will only last until the loan has been fully paid - unlike that of the borrower, which will last for an additional five years.

"When the loan is completed, the record is deleted from the guarantor's account, whether it was good, bad or indifferent," adds Mr Ó Tighearnaigh. "The ICB accepts that the failure of the other party to the loan is no reflection on the guarantor."

First-time homebuyers can be treated with caution by lending organisations merely because they have no credit history. More often than not, however, it is because they are unable to prove that their income could support their outgoings and a loan of such magnitude.

Likewise, the guarantor should be hesitant and ask questions before committing themselves. Remember the experienced lending institution is not prepared to take the risk, so why should you?

A recent survey carried out by Gunne and ICS Building Society notes that 45 per cent of intending first-time buyers would be reliant on parental or third-party assistance. Over the previous 12 months, 66 per cent of first-time buyers confirmed they had relied on parental assistance of some description. Although the majority of this is in the form of parental gifts, a portion is also accredited to parental guarantees.

The most acceptable guarantor is a parent, as they have strong ties to the principal borrower. Although there are no regulations preventing a distant relative or friend to act as guarantor to a mortgage, it is something that occurs less frequently.

Mr Turlough Crowe, sales and development manager with AIB mortgages, emphasises the importance of seeking independent legal advice.

"They should make sure they realise all the implications of all scenarios," he stresses. It is not beyond the realms of possibility that the property could fail to appreciate or retain its value. There is even the possibility that the guarantor be "called upon to repay debt in full", he outlines.

Mr Crowe also highlights the fact that acting as guarantor could restrict their capacity to borrow in the future. The outstanding mortgage value is factored into a person's debt-to-earnings ratio, which is assessed by lending institutions before issuing loans.

Director of Homeloan and independent mortgage broker Mr Martin Gavin says people should be aware of the commitment they are making when they become guarantors to any loan - not just a mortgage. "I've seen people turned down for a mortgage, because their son hasn't paid a car loan," he says.

In most cases, the guarantor is contacted after the borrower has missed three mortgage repayments. According to Ms Moran of BoI, when a borrower and guarantor are involved, the normal practice is to write to the borrower in the first instance to give them an opportunity to rectify the situation.

Ms Moran outlines the scenario where both a borrower and a guarantor are involved: "The borrower is liable for the full repayment and the guarantor is a secondary security." In this situation, she adds, the borrower is deemed unable to afford repayments and so the bank allows a guarantor to guarantee a certain percentage of the loan.

"In practice, only the borrower signs the letter of offer and the guarantor backs this up with a signed guarantee which means that in the event of a default, payment will be sought from a guarantor."

Another scenario, which she says accounts for only a small percentage of cases, is where the borrower and guarantor are both primarily responsible for repayment of the loan. "This usually arises where borrowers cannot afford to take out a loan in their own right. Therefore, both borrower and guarantor take the loan together and both sign the Letter of Offer."

In both circumstances the guarantee can apply to a specified amount over a set time period and reviewed during the term of the loan as the personal circumstances of the borrower change.

Although this will probably require refinancing for the principal borrower, it is good news for the guarantor as it clears up their side of the debt and makes them a more attractive borrowing candidate to any lending institution.

The reality is that unanticipated things happen and people can lose their jobs or fall ill. And the bottom line is that if the borrower does not make the repayments, you are legally bound to step in, pick up the pieces and repay what is essentially a mutual debt.