Guarantor mortgages explained
A guarantor mortgage could help you get onto the property ladder by leveraging your parents’ wealth, helping you overcome credit problems or get a bigger advance.
A guarantor loan doesn’t mean that your parents – or any other close family member willing to help out – will jointly own your new home.
But they take some of the risk attached to the mortgage. This means that their own savings or property would be used as security against the loan.
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How do guarantor mortgages work?
As house prices continue to rise, it’s getting harder for young people in particular to take their first steps on the property ladder.
In many cases, would-be buyers don’t have enough income to afford repayments on the size of mortgage they need. Others might not have enough spare cash to use as a deposit.
With standard mortgages, lenders work out how much they’re willing to lend by looking at factors like your earnings and credit history.
You’ll typically also be required to put down at least 10% of the property’s purchase price as a deposit.
This helps the bank or building society ensure they won’t face any losses if the home’s value falls, and they have to repossess it because you can’t keep up with repayments.
But if you don’t earn enough to qualify for the size of mortgage you need, or if your credit history isn’t great, a guarantor mortgage could be an ideal solution.
This involves a parent or other relative agreeing to provide their own savings or property as collateral against your loan.
From the lender’s point of view, if at any point you can’t make repayments, they could go after the guarantor for any shortfall. This reduces the risk faced by the lender.
Guarantor mortgages aren’t just for first-time buyers. They could help you move up the property ladder if you’re already an owner, but don’t earn enough or have enough savings to afford a pricier place.
What are the risks of guarantor mortgages?
With a standard mortgage, the lender takes the property as security on the loan. This means that if the borrower can no longer make repayments, the bank or building society could repossess their home.
With a guarantor mortgage, the lender has a claim on the savings or property of the guarantor, as well as the property itself. This depends on how the agreement is structured.
So what could this mean in practice? As with a standard mortgage deal, the lender could repossess the borrower’s property if repayments aren’t being made.
But if the property’s market value falls to less than the outstanding balance on the mortgage, the lender could be left out of pocket.
If this happens, the lender could seek to make up the difference from the guarantor.
Often, guarantor mortgages only require borrowers to put down small deposits. This means that there’s a greater chance of the property’s value falling below the mortgage balance.
It’s vital that any guarantor understands exactly what the risks are, and they should seek their own legal or financial advice before signing up.
Who can be a guarantor?
Most commonly parents act as guarantors, but mortgage companies sometimes allow grandparents or other close family members to be guarantors.
Some lenders require the guarantor to own their own home – either outright or with a relatively small mortgage outstanding – so that it can be used as security.
In any case, the guarantor’s overall financial situation is also taken into account in the application process.
If they have a poor credit history, for example, or high levels of debt, they may not be accepted.
Savings-based guarantor mortgages
While most guarantor mortgages use the guarantor’s property as additional security, others use a pot of cash savings as collateral.
This means that the guarantor puts cash worth a certain portion of the purchase price into a special account.
This money is typically held in the account until the borrower has repaid enough of their mortgage, or their home’s value has increased to a certain level.
The guarantor may get interest on the account, but it’s unlikely to be a market-leading rate.
Ending a guarantor mortgage
If you keep making mortgage repayments and the value of your property rises, you should soon reach a point where you could switch to a standard mortgage.
This means the guarantor is freed from their obligations. If the value of your property falls, however, it could take you much longer to reach this stage.
Alternatives to guarantor mortgages
Some buyers consider joint mortgages as a way to take advantage of a parent or other relative’s income.
This involves both you and your parent taking out a mortgage together, using your combined earnings to get a bigger loan.
However, there are a number of potential problems to consider here.
Some joint mortgages require both parties to live at the new property.
And even if this isn’t the case, if your parent already owns a home, they could face extra tax charges when buying a second property.
If your parent is retired or close to retirement, the lender may be concerned about their level of income too.
Another type of mortgage, called a ‘joint borrower, sole proprietor’ loan, could overcome some of these hurdles.
These mortgages allow two people to team up for the purposes of the loan, but only one of their names goes on the property’s deeds.
This could solve any tax issues relating to second-home ownership, but only a handful of lenders offer such deals.