A guarantor mortgage may be an alternative for those with a little (or no) deposit, low credit, less consistent income, or a variety of other borrowing hurdles. Having a parent or close family member act as guarantor for your mortgage may be the extra step you need to take to get on the home ladder. They may help you get more money or better rates, but guarantor mortgages are risky, so do your homework beforehand. Here’s everything you need to know.
What is a Guarantor Mortgage?
A guarantor mortgage is a technique to secure a mortgage when you lack the needed deposit or have financial conditions that may deter lenders from lending to you. When someone agrees to act as a mortgage guarantor on your behalf, they undertake to cover the repayments if you fail to do so. A guarantor mortgage, also known as a family aided mortgage, is a mechanism for parents (or grandparents) to assist their children in getting on the property ladder.
The guarantor will not own a stake in the property and will not be named on the paperwork. So, being a guarantor entails merely signing a legal agreement to cover mortgage payments if the primary borrower falls behind.
What is the Process of Obtaining a Guarantor Mortgage?
A guarantor mortgage uses someone else’s home as security, with the lender having the right to forcibly sell it if neither the guarantor nor the borrower can keep up with the borrower’s mortgage obligations. This decreases risk for the lender by ensuring that they will not be out of pocket if the monthly mortgage payments are not made.
- The person who agrees to be a guarantor adds their name to the legal paperwork, committing to repay the loan if the borrower is unable to. They will not be listed on the property’s title records, nor will they own any portion of it.
- The guarantor is frequently required to use their own property as’security,’ which means that if neither the mortgage borrower nor the guarantor can make the repayments, both of their properties may be at risk.
Savings, rather than property, are used in some guarantor mortgages. This can be done in a variety of ways, for example:
- The guarantor deposits money into a specific savings account to be used as collateral for the mortgage. If the mortgage is late on too many payments and defaults, the money is taken from there to pay it off. The savings account can still earn interest, and if it isn’t needed to help pay off the mortgage, it can be used as a regular savings account.
- The guarantor deposits funds into an account linked directly to the mortgage, lowering monthly payments. However, no interest is paid, and the guarantor normally only receives their money after the mortgage is fully or nearly fully paid off.
Who is Eligible to be a Mortgage Guarantor?
Many lenders will demand a close family member – generally a parent – to be the guarantor for your mortgage. Your guarantor must have the following qualifications:
- Savings or property: To secure the mortgage, lenders will either retain some of your guarantor’s savings in a locked account or place a legal charge over a portion of their property.
- A strong credit history: so that lenders can be confident in their financial stability.
- Received legal advice: this is a requirement from some lenders to ensure guarantors are aware of the hazards.
Who can benefit from Guarantor Mortgages?
If you want to buy a home with a guarantor, a guarantor mortgage could be a good option.
- A low income: Because lenders choose how much to offer you depending on your income, having a guarantor may allow you to secure a larger loan.
- A low/no deposit: With a guarantor mortgage, you might potentially borrow up to 100% of the value of the home.
- A negative credit score: Having a guarantor may make a lender more willing to lend to you.
- If you have little or no credit history, such as if you’ve never had a credit card.
An independent mortgage broker can provide you with more detailed information on whether a guarantor mortgage is right for you.
Different Types of Guarantor Mortgage
Guarantor mortgages have slightly various names and eligibility requirements, but they generally fall into one of two categories:
#1. Savings as a safety net
Some lenders provide mortgages in which a family member saves funds (usually 5%-20% of the purchase price) in a special savings account. The funds are retained as security for your mortgage for a specified number of years, or until the amount owed falls below a specific percentage (e.g., 80%) of the property’s value. Your family member can normally earn interest on the money tied to your mortgage, albeit the rate may be lower than they would receive from other savings accounts.
If you fail to make any mortgage payments, the lender may keep your family member’s money for a longer period of time. If the lender has to seize and sell your property and receives less than what you still owe on your mortgage, they may be able to recover the difference from a family member’s savings.
#2. Property as a security measure
A charge is imposed against the guarantor’s property in these transactions. This means that the guarantor will likely need to possess a large amount of their property outright in order to be qualified. In the worst-case situation, your family member could lose their house if the lender were to seize and sell your property for less than the amount owed on the mortgage.
What is the maximum amount you may borrow with a Guarantor Mortgage?
The amount you can borrow will be determined by your financial situation. Guarantor mortgages, on the other hand, can let you borrow more than regular deals in two ways:
#1. By providing a 100 percent LTV
Some offers allow you to borrow up to 100 percent of the property’s worth, which eliminates the requirement for a deposit. This can help you jump on the housing ladder without having to wait years for your savings to accumulate.
#2. By examining the income of your guarantor
Some purchasers may fail to obtain a mortgage because their salary is insufficient to finance the property they desire. When a lender considers your guarantor’s income, they may agree to lend you more than you would if you applied alone.
A lender might normally only grant you a mortgage for a property worth £150,000, but with your guarantor, it may allow you to get one for up to £180,000. Here’s how to be sure you can afford your mortgage payments.
What are the Costs of a Guarantor Mortgage?
All of the costs associated with guarantor mortgages are the same as those associated with regular mortgages, including:
- repaying the sum borrowed
- Interest
- Fees for obtaining a mortgage
- Fees for valuation
- Attorney’s fees
- Broker or mortgage adviser commissions
The Risks of a Guarantor Mortgage
#1. Home security for the guarantor
Becoming a guarantor is a major risk if you, as the borrower, are unable to make the mortgage payments. They will be responsible for covering the cost. If the guarantor has used their home as a guarantee for the mortgage, this may put their own property at risk.
#2. Long-term dedication
The guarantor is normally linked to the mortgage until enough payments have been made to lower the mortgage loan-to-value to a specified percentage – usually 80 percent, but it can be higher. This means that a guarantor mortgage might last for decades.
#3. Relationship between Credit Records
A guarantor mortgage also links people’s credit histories. If either person has a poor credit rating or suffers from poor credit in the future, it might damage the other’s credit score and ability to borrow money, whether through a loan or a credit card.
How to Get a Mortgage with a Guarantor
#1. Find a good deal
The first step toward obtaining a guarantor mortgage is to weigh your choices. Make sure to compare the interest rate as well as the costs associated.
#2. Examine the eligibility requirements.
Examine the lender’s terms and conditions to see if you qualify for guarantor mortgages. This can be determined by:
- Your age, as some mortgage lenders only accept candidates above the age of 21.
- Where you live. This is because some agreements are only available to borrowers in England and Wales, while others are only available to borrowers in Scotland.
- Your income, outgoings, and credit history all have an impact on whether you can afford the repayments.
- If you have a deposit, although there are many guarantor mortgages available with no deposit.
- You are a first-time buyer because certain offers are only available for your first home.
- If the property will be your primary residence, most deals are not available for second homes or rental properties.
#3. Seek advice
Most guarantor mortgages are only accessible if you and your guarantor seek assistance from the following sources as part of the application process:
- A lawyer who can explain the legal ramifications to both of you.
- A mortgage adviser or broker can also assist you in finding the best deal.
- You must demonstrate that you received guidance from either or both of them, depending on your lender’s requirements.
#4. Consider your options.
If you’re not sure if a guarantor mortgage is suitable for you, or if you can’t find anyone willing to be a guarantor, you may be able to secure a mortgage with a low deposit. For example, the government mortgage guarantee scheme, proposed in the 2023 Spring Budget, intends to assist first-time purchasers and those relocating to obtain a mortgage with a 5% deposit.
Tips for Obtaining a Guarantor Mortgage
Be honest about your situation. Since honesty is essential in financial situations, it’s critical to be truthful with your guarantor or the individual you’re pledging to be a guarantor for. All potential consequences must be examined.
#1. Make use of a solicitor.
A mortgage is a significant financial commitment, and money concerns can be difficult. Formal agreements eliminate the possibility of grey areas and may save you from problematic problems in the future.
#2. Maintain limits.
If you agree to be a guarantor, keep in mind that the house is not your home. Attempting to enforce rules or expecting to have a say in certain areas may result in a fight with the owner.
- If you are unable to pay your mortgage, you may be held liable as a guarantor.
- If you make all of your payments on time, your guarantor will not have to do anything.
However, if missed payments force the lender to seize and sell your property, both you and your guarantor are typically liable for any deficit if the property sells for less than the amount still outstanding on the mortgage.
For example, if you owed the lender £150,000 but they could only recover £125,000 by repossessing and selling your home, the £25,000 difference may be deducted from your guarantor’s funds or property, depending on what they used to guarantee the mortgage.
The simplest method to reduce this risk is to refinance as quickly as possible to a loan that does not require a guarantor. So, this will be attainable if you’ve accumulated enough equity in your home (by paying down your mortgage plus any growth in its value).
What Alternatives are there to a Guarantor Mortgage?
Guarantor mortgages are only one of the many ways parents can assist their children in purchasing a home.
Among the choices are:
#1. A bequeathed deposit
A homebuyer’s parents or a family member can contribute a portion of the deposit or the entire deposit. However, there must be an understanding that the homebuyer will not be required to repay the money. Also, the person gifting the deposit would not have any ownership interest in the house.
A donated deposit raises the amount of money a homeowner must put down on a home. Thus, this allows them to access better mortgage packages and lower their monthly payments.
#2. Savings to offset
Family offset mortgages connect a family member’s savings account—typically the parent’s or grandparent’s—to the homebuyer’s mortgage.
The amount in the savings account reduces the total mortgage amount, making repayments less expensive. Once a certain percentage of the mortgage is paid off, usually around 75%, the owner of the savings account can access their money again.
#3. A mortgage that is co-signed
Parents or family members may be able to co-sign on a mortgage with the homebuyer. So, combining earnings can increase the size of the available mortgage, spread the cost, and allow buyers to access additional mortgage packages. Some lenders will accept up to four incomes on a single mortgage.
#4. Other Alternatives
If your parents are unable to assist financially, there are government initiatives that may be of assistance. If none of these solutions is viable, you may have to wait until you’ve saved enough for a larger deposit. Remember that if your parents want to help, they can do it without spending any money, for example, by having you stay in their house while you save.
Guarantor Mortgage FAQs
Are guarantor mortgages more expensive?
Guarantor mortgages have the same fees as normal mortgages, including repaying the amount borrowed.
How long does a guarantor stay on a mortgage?
Typically, guarantors stay for two to five years, depending on a variety of conditions. The first is how quickly you pay off your debt, and the second is how rapidly your property appreciates in value. Remember that the guarantee cannot be removed automatically and must be removed through refinancing.
Does a guarantor get credit checked?
Yes, the lender will consider the risk of financing to you. As a result, they’ll do a credit check on your guarantor to ensure that they’re a dependable borrower who will return the bill if you can’t.
