Exploring the increasing need for co-signers and guarantors for property finance transactions.

In recent years, the role of the guarantor and co-signer has become increasingly important to property finance. Many lenders have looked to reduce their exposure to risk, particularly where more valuable, short-term loans such as bridging finance are involved. As a result, using a second party to support the transaction has grown in popularity. The presence of this added financial certainty is beneficial to both borrowers and lenders and helps facilitate the swift but prudent delivery of funding.

But what exactly is the role of a guarantor, how does it differ from that of a co-signer, and why is their involvement becoming increasingly common in property finance? It is important for your client to understand these distinctions when considering a bridging loan.

What is a guarantor?

A guarantor is a third party that assumes responsibility for a borrower’s financial obligations if the borrower cannot meet them. In property finance, the guarantor does not necessarily have a claim to the property but instead offers a financial backstop. Their involvement reduces risk and provides the lender with a guarantee that the loan is supported by an individual with sufficient means or creditworthiness to fulfil the obligation, should the primary borrower default.

Guarantors are often family members, business partners, or trusted associates. Their own financial situation is carefully scrutinised by the lender, as their income, assets, and debts are factored in as a vital part of the loan approval.

What is a co-signer?

While related, a co-signer serves a different purpose. A co-signer is a joint applicant for the loan agreement. The co-signer also signs the agreement, along with the borrower, and becomes equally legally and financially responsible for the debt. Unlike a guarantor who becomes responsible only if the borrower defaults, a co-signer is responsible from the onset. Therefore, the co-signer and borrower are both considered co-applicants by the lender.

This distinction means a co-signer’s income, credit history, and financial decisions are directly linked to the success of the loan. Therefore, defaults or late payments can impact both parties’ credit histories.

The level of involvement also differs. A co-signer usually has access to the loan details, repayment schedule, and may be involved in managing the financial arrangements. However, a guarantor typically remains at arm’s length from the day-to-day loan management unless issues arise.

Why the demand is growing in property finance?

The rising cost of property and stricter lending criteria and increased regulatory oversight have created a situation where more borrowers require assistance to secure finance. As a result, bridging loans are seeing increasing demand for guarantors and co-signatories.

From the lender’s perspective, a guarantor or co-signer offers an extra level of assurance. This particularly important if the applicant doesn’t meet all the financial requirements in their own right. This commonly includes situations where borrowers wish to engage in higher-risk transactions or for those requiring larger sums.

A practical example

Consider the case of a property developer looking to purchase a residential property at auction. The intention is to renovate and sell the property in six months’ time. Due to the short timescale, the developer opts for a bridging loan. Despite the fact that the property clearly has good resale value, and the borrower has a strong business track record, the lender may nevertheless require additional security.

In this scenario, the borrower’s business partner, who has substantial assets acts as a guarantor. This allows the lender to issue funds in a timely manner, safe in the knowledge that there is a second individual who has agreed to take on the debt if required. The loan is secured against the property being purchased, but the guarantor provides a secondary level of assurance. This ensures a smooth and efficient process for all parties.

The role played by guarantors in building trust

Trust is a key component of any financial transaction, especially in property finance where substantial sums of money change hands. A guarantor plays a key role in bridging any gaps between the borrower’s application and the lender’s requirements.

By agreeing to become a guarantor, the individual is showing firm belief in the reliability and credibility of the borrower. This added support can be particularly helpful for less experienced borrowers who do not yet have substantial financial histories or for individuals taking their first step into property investment.

Guarantors are also increasingly being used in intergenerational transactions. For example, parents who are assisting their children with efforts at purchasing property may offer to act as guarantors. Therefore, allowing the next generation to obtain finance without sacrificing equity.

Facilitating growth and opportunity through bridging finance

The flexibility and speed of bridging loans make them an excellent choice for a wide range of property investment scenarios. From purchasing properties at auction to funding light refurbishment or acting as a bridge between a purchase and a sale.

Bridging finance lenders like Alternative Bridging Corporation are far more flexible than conventional lenders. We are a primary lender which means we have access to our own capital, and we review applications on a case-by-case basis. Also, our entire team is under one roof, meaning we can deliver outstanding service and process applications without delay.

In order to cater to the increasing demand of flexible property financing, we offer a range of bridging loans. These loans are transparent, fast, flexible and can be customised to your clients’ unique circumstances. We offer:

Residential Bridging Loans

Residential Bridging Loans are cost-effective loans that are ideal for raising short-term finance on all types of investment properties. They can be used for purchasing property, refinancing, property improvement, or to unlock working capital to make further investments.

Light Refurbishment Bridging Loans

These loans finance projects that require no planning permission and are made in three stages. They can be used to refinance or purchase property, or to fund improvements up to 70% of the improved value to enable the release of working capital for your future property renovation project.

Commercial Bridging Loans

Commercial Bridging Loans are designed to be a much shorter-term arrangement than a commercial mortgage, which gives you quick access to capital and enables you to buy or renovate property.

Our commercial bridging loans are available on a range of properties including:

· Retail units.

· Shopping centres.

· Office buildings.

· Industrial and distribution premises.

· Residential investments.

The growing role of guarantors

The growing role of guarantors and co-signers reflects the realities of today’s property market. Transactions move quickly, and not every transaction can fit within the constraints of conventional lending criteria. In these cases, having a guarantor or co-signer involved can make the difference between securing deals or missing out.

We assess each application on its individual merits, and when appropriate, the inclusion of a guarantor helps strengthen the overall structure of the loan. It gives us added assurance while giving our clients the ability to move forward without unnecessary delays. Therefore, we are able to offer clear terms, responsive service, and funding when it counts.

If you have any further questions about the roles of guarantors or our range of Bridging Loans, get in touch.