Guarantor mortgages are home loans designed for people who might not be able to get a mortgage on their own. The guarantor agrees to pay the mortgage if the borrower cannot make the repayments themselves.
Often these sorts of loans are helpful for buyers who have little or no deposit, who are on a low income, or who have a poor credit rating. They allow banks and building societies to lend to people they might not otherwise, by spreading the risk.
Guarantors are typically family members or close friends of the borrower who have their own home already. Guarantors are jointly responsible for the debt, putting their own home or savings at risk, so it’s a significant undertaking, and they should make sure they take legal advice before agreeing.
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A mortgage with a guarantor allows you to borrow cash that you wouldn’t otherwise have been offered. By having reputable borrowers such as your parents as guarantors, banks have the reassurance that they will still get what they are owed if you default. This reduces their risk, so it allows them to lend more widely.
Although the named borrower owns the property, the guarantor is legally responsible for the debt. They will need to offer their own home or savings as security to the mortgage lender. If you can’t make the monthly payments, your guarantor must pay, or the bank could take whatever was offered as security.
Consequently, if the guarantor’s home is used as collateral, as it usually is, it could be repossessed in extreme cases.
The person who acts as a guarantor will need legal advice as they will be putting their name on legal documents and risking their own assets.
If no repayments are missed, nothing will be required of the guarantor. It’s only if things go wrong that the lender will expect both the borrower and the guarantor to put things right.
Guarantor mortgages can be useful for lots of different potential homeowners. Typically, you might consider one if you have:
A low income. Providers usually decide how much to give you based on a multiple of your salary. If it’s low, you might find that the amount they’ll lend you isn’t enough to get the home you want. Having a guarantor may enable you to get a bigger loan.
Little or no deposit. Usually, you need a deposit of at least 5% to get on the property ladder, but the more you have, the better the deals on offer. A guarantor means you might be able to borrow 100% of the amount you need, ideal if your savings aren’t enough for a meaningful deposit.
A bad credit score. Lenders want to be sure that you’ll pay them back on time, so a bad credit score will make them nervous. This means they might not lend you what you need, even if you can afford the repayments on paper. If they have doubts, having a guarantor on board can be the clincher.
Little or no credit history: Many of us shy away from credit cards and loans, but having no credit history means it’s hard for lenders to know if you’re a responsible borrower or not. If providers don’t have enough information to be 100% confident about granting the loan – a guarantor can help.
Although guarantor mortgages may seem more suited to first-time buyers, other borrowers can use them. For instance, someone who is:
Taking out a mortgage to move home
Remortgaging, provided past payment history shows a good payment record
Changing the borrower, perhaps buying a former spouse out of a joint mortgage.
Guarantor mortgages sometimes allow you to borrow 100% of the property value rather than needing a deposit. Typically, lenders will only offer up to four times your salary, but some will stretch to five times what you earn. If you have a guarantor in place, you might be able to borrow at the top end of affordability.
Lenders will still carry out affordability checks on the borrower, and they shouldn’t agree to a mortgage if they think you will struggle to make repayments. This means that the amount you can borrow will still be dependent on what you earn and how much you can repay each month.
Typically, borrowers take out parental guarantee mortgages, although guarantors are not strictly limited to parents and could include other family members, such as grandparents or aunts and uncles.
Banks and building societies usually expect a guarantor to be a close member of the borrower’s family. However, sometimes you can have a guarantor you are not related to, such as a long-standing friend or godparent.
All guarantors must be homeowners in their own right. Some lenders expect them to have paid off their own mortgages in full, although other lenders are less strict about this.
Other requirements can include:
Having a certain amount of equity or savings
Earning a high income
Having an excellent credit record
Taking legal advice
A guarantor mortgage can help you get a property with a low income or deposit. However, you should look closely at your finances to ensure you can afford your repayments, or you'll force your guarantor to cover the shortfall.”Nisha Vaidya, Mortgage Editor
A guarantor offers up assets as collateral against your mortgage loan, typically savings or their own home. They’re jointly liable for the debt, which means if you fail to meet your repayments, they face having their assets repossessed. In extreme cases, both the borrower and the guarantor could lose their homes, but there are stages before that happens.
If you fall behind on your mortgage repayments, you might be offered more time to make up the shortfall in the first instance – but you might also be charged a fee. If you can’t make the repayment, your guarantor could be asked to make it on your behalf.
If you keep missing payments, things could become more serious. If your guarantor put up savings as collateral, they may be told that they can’t access the money for a longer period of time, or those savings could be used to pay off your debt.
Your house could be repossessed and sold to pay off your debts, and if there’s still a shortfall and the sale doesn’t cover what you owe, the lender could repossess the guarantor’s home or find other ways to recoup the debt from your guarantor.
If you meet all your repayments on time, your guarantor won’t have to do anything, and all their collateral will be safe. A good way to protect a guarantor is to remortgage to a standalone mortgage as soon as your circumstances allow.
For instance, when you have repaid a chunk of the mortgage, the lender might agree that you can borrow the rest without needing the security of a family member. If your salary has risen, you might beagle to get a mortgage on your own.
This is when the guarantor agrees to set aside money in a savings account. The savings may still earn interest but are there to be used as security in case the borrower misses a repayment.
A charge is placed against the guarantor’s property, which acts as security against your loan. In a worst-case scenario, the guarantor’s home could be sold to pay off the outstanding debts.
This is when a family member's savings are put in an account linked to the borrower’s mortgage as an offset, making repayments more manageable. Once a certain period has elapsed, or enough of the mortgage has been repaid, the guarantor gets their money back, often with interest.
Technically not a guarantor mortgage, this type of mortgage allows two people to buy a property together. While both parties will go on the mortgage, only one name will go on the deeds, meaning you avoid second home stamp duty difficulties.
Sometimes called a ‘parent offset mortgage’ this is when a family member’s savings account is linked to the borrower's mortgage to offset the loan and make repayments affordable. If all repayments are made on time, the family member will get all their money back, often with interest.
Yes – guarantor mortgages are a good way of securing lending if you have a poor credit score. The risk is reduced for the provider, because the guarantor is also liable for the debt.
Most mortgage lenders offer guarantor mortgages, but you might get a better rate if you use a specialist. Use comparison sites to see what’s out there and secure the best deal.
How much you can borrow will be linked to your earnings and what your lender thinks you can afford to repay. Typically, lenders look at multiples between three and five times your salary, but they will consider your circumstances.
Sometimes, a guarantor mortgage will allow you to buy without a deposit, meaning you can borrow 100% of the property value. You might also be able to borrow at the top end of your affordability, getting you a higher sum overall.
The interest rate you get will depend on your loan-to-value and how much you borrow. If you use a guarantor to get a 100% mortgage with no deposit, you’ll typically face a higher interest rate. Shop around to find the best deal and make sure you can afford the monthly repayments with interest.
The guarantor is named on the mortgage documents, but not the property's title deeds. This means they are jointly liable for the debt, but have no entitlement to, or share of, the property.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
|Based on borrowing||£170,000 over 25 years||The overall cost of comparison||4.46% APRC Representative|
|Initial rate||3.34% fixed for 2 years (24 instalments of £884.45pm)||Subsequent rate (SVR)||4.66% variable for the remaining 23 years (276 instalments of £944.66pm)|
|Lender fee||£517||Total amount payable||£282,470.34|
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