At a Glance: Understanding the Different Obligations of Mortgagor, Borrower and Guarantor

When applying for a mortgage, in addition to the owner, other parties can take up the role of borrowers or guarantors. This article covers the different obligations of each role and the impact on their future borrowing capacity.

Buying property can be a personal decision, or part of a family's wealth strategy. Do you know that, when applying for a mortgage loan, apart from the mortgagor (property owner), you may introduce other people to take part as borrower or guarantor? The following cases illustrate the obligations and differences of each of these roles:

Mortgagor = Property Owner

Example: Mike is a civil servant with a stable income who just bought a property in his own name, and he can afford the mortgage repayment without anyone else's contributions. He can apply for a mortgage by himself, and that makes him both a mortgagor and a borrower. What this means: Borrowing capacity: As in Mike's case, the owner (mortgagor) can simultaneously take the role of borrower when applying for a mortgage without involving other people, if his/her financial situation permits. Credit history: When you become a mortgagor or borrower, it will go on your credit record, and may affect your borrowing capacity if you want to take out a mortgage on another property later. Point to note: If a property has multiple owners at the same time, all owners must agree to mortgage the property when taking the application, and become mortgagors to take on the obligations of the loan.

Borrower = The person responsible for the loan debt and for making payments

Example: Anson is getting married next year and wants to buy a new apartment in joint names with his fiancée. They will both be the owners (mortgagors) while Anson (also as borrower) will be responsible for repaying the mortgage. What this means: Borrowing capacity: The bank reviews the borrower's financial and credit status to check if he/she alone is capable of repaying a mortgage. if needed, he /she can introduce more people to be borrower of the mortgage loan. Credit history: If the borrower is already repaying a mortgage on another property, or is a guarantor for other mortgages, the maximum of his/her loan-to-value (LTV) ratio and debt-to-income (DTI) ratio will be reduced. The LTV of borrowers will be reduced when applying for a mortgage on another property in future. Point to note: Although the mortgagor is usually the borrower, as in this example with Anson, these two roles can be taken up by different people. However, he bank will regard the mortgagor as having mortgage obligations under the mortgage even if the mortgagor (owner) is nor borrower, and it will affect the mortgagor's LTV and DTI calculation when applying for a mortgage in future.

Guarantor = The person who provides a guarantee for a mortgage

Example: Gigi's parents wanted to enjoy their retirement in a new home, but it is difficult to apply for a mortgage without sufficient income. Gigi listed herself as additional borrower and her parents as the property owners (mortgagors + borrowers). However, her repayment ability was still insufficient to take out the mortgage, so her brother signed on as a guarantor. What this means: Borrowing capacity: If the borrower's repayment ability is deemed insufficient - for example, their DTI ratio fails to meet the requirements - then they can introduce an additional borrower, or a guarantor. In the event that the borrower fails to repay the loan, the guarantor will also be responsible for the debt. Credit history: Since the guarantor will be seen as having a mortgage record, his/her ability to borrow may be affected if he/she applies for other loans later. Point to note: If the borrower cannot repay and breaches the mortgage, guarantor will also be responsible for the related legal obligations to repay the debt. Think carefully before becoming a guarantor.

 Tips:

• Whether you are thinking of becoming a mortgagor, borrower or guarantor, you must consider the impact on your future borrowing capacity, and plan carefully, especially if you intend to buy other properties in future.

Note: Mortgage loan approval is subject to the applicant's personal circumstances and the applicable terms and conditions and policies at the time. Approval is subject to credit assessment and the bank reserves the right of final decision.

To borrow or not to borrow? Borrow only if you can repay!

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Issued by The Hongkong and Shanghai Banking Corporation Limited