A guarantor mortgage might help you get on the property ladder, but it puts your family member or friend's finances at risk. Learn more about this type of mortgage below.
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What is a guarantor mortgage?
It’s a mortgage that's supported financially by another person (as well as the applicant), known as a guarantor.
Lenders use the property you buy as security, but a guarantor offers additional security – usually their own home, or savings.
There's few different types of guarantor mortgage, and each works slightly differently. But all are designed to help those struggling to buy a home on their own.
In some cases, guarantor mortgages can help you borrow 100% of the cost of buying a home.
How do guarantor mortgages work?
When you take out a guarantor mortgage, the guarantor is added to the application and their security is held by the lender.
But the property is fully-owned by the main applicants - the guarantor won’t appear on the deeds.
Traditional guarantor mortgages tend to be secured on the guarantor’s property. The guarantor usually needs to own their home outright or have a minimum level of equity.
They also commit to repay the mortgage if the applicant becomes unable – so are legally responsible for the debt.
The applicants repay the mortgage in the same way as a standard mortgage – usually over a term of 25-35 years.
Once they’ve repaid a certain amount, or reduced the loan-to-value (LTV) to a level the lender's happy with, the guarantor can be removed.
If you become unable to repay your mortgage, the lender repossess (takes back) your home to reclaim their money. The guarantor’s home is also at risk if they fail to repay the loan from the property sale.
Savings-based guarantor mortgages
Due to the high risk to guarantors of using property as security, savings-based guarantor mortgages – or family assisted mortgages – are more popular nowadays.
With this type of guarantor mortgage, the guarantor doesn't put their home at risk and won’t usually commit to repay the loan if the borrower fails to. Instead, they deposit cash into a savings account with the mortgage lender.
They usually earn interest on their savings, but with some lenders they can choose to offset it against the mortgage interest. This further helps the applicants repay their mortgage by reducing the interest payments.
The savings are held as security for either a set number of years, or until you’ve reduced your mortgage balance to a certain amount or LTV.
If you’re unable to repay the mortgage, the lender repossesses and sells your home to get their money back. If the sale doesn’t fully cover the loan, any remaining balance could be taken from the guarantor’s savings.
Who is a guarantor mortgage suitable for?
There are a number of situations where a guarantor mortgage could be helpful:
- You can’t save a large enough deposit
- You have no credit history or bad credit
- You can’t afford to borrow enough to buy the property you want or need
Although they're often used by first-time buyers, you don’t have to be one to make use of this type of mortgage.
Who can be a guarantor?
Guarantors are usually close family members, such as parents or grandparents, but some lenders also allow friends to be one.
Depending on the type of guarantor mortgage you choose, they need to meet certain criteria:
Age requirement – they must be at least 21. Usually there's also a maximum age limit of around 75.
Income requirement – they have to prove they could afford the repayments if you couldn’t
Credit score - they need a good credit record.
If using their property as security – usually it must be owned outright or they need 50% equity or more. Equity is the proportion of the property they own after deducting any outstanding mortgage debt.
If using savings as security – they need to open an account with the lender or have an existing account linked to the mortgage. They then need to deposit a minimum amount of savings and leave it in there for the required time - set by the lender.
Proof of legal advice – as there’s a high risk to the guarantor’s property or finances, some lenders ask for proof they’ve taken independent legal advice.
What are the risks of guarantor mortgages?
Most of the risk involved with a guarantor mortgage impacts the guarantor. Although there’s some risk to the applicant(s) if the guarantor has a change of financial circumstance, or dies whilst acting as guarantor.
The guarantor puts their own property or savings at risk, without any real financial reward. This is why it’s often close family members acting as guarantors. That said, helping people financially is an emotionally charged action, and could put the relationship at risk for both.
Aside from the risks, there are a few additional downsides for mortgage guarantors, such as:
- Credit score – this could be negatively impacted if the mortgage applicant doesn’t repay their mortgage.
- Access to savings – as well as putting your savings at risk, if they’re used as security, you can't access them for a set period. This means if you suddenly become worse off, you can’t rely on your savings.
- Losing out on interest – if you use an offset family mortgage you won’t earn any interest on savings you otherwise would. Even a standard family assisted mortgage is likely to pay less interest than a high yield savings account.
Switching your guarantor mortgage to a standard mortgage
With any type of guarantor mortgage, the goal is to minimise the risk of lending to risky borrowers. This means that once you become less of a risk, you’re less likely to need a guarantor.
Mortgage lenders consider you less risky when the LTV of your borrowing falls. This usually happens as you repay your mortgage, but an increase in property price also helps.
Once the lender's confident that you can repay the remaining balance without a guarantor, you can look at remortgaging.
Remortgaging onto a standard residential mortgage with a lower LTV (and without a guarantor) should give you access to much better rates. It may also mean you can repay your mortgage quicker, as well as reducing the amount of interest you pay overall.
What happens if my guarantor is unable to make repayments?
If they're unable to make payments, lenders usually look at a repayment plan that works for everyone first - for example, extending the mortgage term.
If nothing is agreed then eventually they look at repossession. If repossession of your home doesn’t pay the outstanding balance, the guarantor’s home or savings are used to cover the rest.
If the guarantor refuses to pay they can be prosecuted as they're in breach of contract.
Do guarantors get credit checked?
Yes they do. The lender is looking for someone to be financially responsible for the mortgage, so they usually need better credit than the applicant.
Can you be a guarantor if you're retired?
So long as you’re able to prove that you can afford the repayments if the applicant can’t, and have property or savings to secure the loan on, then yes.
But the maximum age criteria could be more difficult for a retired guarantor to meet.
Can I get a guarantor for a buy-to-let mortgage?
It’s possible, but quite unlikely. If you’re looking to use a guarantor for a buy-to-let mortgage you should speak to a specialist broker.
Alternatives to guarantor mortgages
There are a number of other mortgage options you could look at if a guarantor mortgage is not right for you:
Joint mortgages– if you can’t afford a deposit or mortgage repayments alone, buying with a partner, friend or family member can help. Although keep in mind that you share ownership with them.
Joint borrower sole proprietor (JBSP) – this type of mortgage lets you buy jointly with another person that isn’t on the property deeds. This means you share the responsibility for the mortgage, but not ownership of the property. Many parents find this a useful way to help their children onto the property ladder.
Home ownership schemes – for those without family or friends able to help, there are a few government schemes aimed at helping people struggling to buy. For example, the shared ownership scheme helps you borrow less, so the deposit requirement and repayments are smaller.