The Citizens Advice Bureau have issued guidance for mortgage borrowers, which raises concerns that kind hearted benefactors could see their own lending options limited, if they choose to act as a guarantor on loans for family and friends. The view of payday loans at underwriting level has become damaging to the chances of a mortgage application succeeding in recent times, and the Bureau are noting that the same view is being taken where a borrower has innocently acted as a guarantor for small lending.
The reference to guarantor loans is not towards the option first time buyers have to be backed by a wealthier individual, in order to secure a mortgage. The caution is rather being directed towards offering guarantor security for adding ones name, to support unsecured loans of a much lower level, for anyone with a poor credit history. This has become a burgeoning market in recent times, with the level of borrowing on offer ranging from £1000 to £7500, on interest rates averaging 46.3 per cent.
After the FCA chose to crackdown on payday lenders over the past 12 months, the options available for short term, instant lending have become restricted. However, the regulating body has not paid the same focus to the guarantor sector, choosing to deem the loans to be outside of the perceived ‘high cost credit’ market.
Citizens Advice does not agree with this assessment, noting that 43 per cent of the people they were approached for guidance on the loans did not fully understand their responsibilities, in relation to acting as a guarantor. Most, for instance, claimed to not know that in the event of the death of the borrower, they would still be chased to repay the debt on their behalf.
Under the changes implemented by the FCA to mortgage advice, within its Mortgage Market Review, it was made clear that anyone acting as a guarantor would be privy to the advice process and could be fully aware of their rights under the agreement. No such ruling is in place for the smaller guarantor loan sector at this time, leaving many guarantors with no clear understanding of their individual rights.
With the market expanding year on year, Citizens Advice is concerned that any intervention by the FCA may be overdue, to the detriment of many guarantors already caught in the trap. According to data produced by the charity, the market is now worth £154m. The same figures project that the biggest lender in the market saw their turnover grow by 30 per cent and its profit by 40 per cent, between 2013 and 2014.
The Chief Executive for the charity, Gillian Guy, noted that: “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.”
Article By: Simon Butler, Senior Mortgage Consultant at Contractor Mortgages Made Easy
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