What is a guarantor mortgage?

Last updated: June 2024 | 3 min read

Guarantor mortgages are for those who may struggle to get a mortgage by themselves, such as those with little deposit, low income, or poor credit. A guarantor, usually a family member or a friend, agrees to pay the mortgage if needed. This allows lenders to extend loans to higher-risk borrowers. However, guarantors take on significant responsibility, risking their own homes and savings.

Of the many types of mortgage options in the UK, the guarantor mortgage loan is a solution for those who might be struggling to get on the property ladder.

A guarantor mortgage involves a mortgage guarantor who promises to cover the mortgage repayments if the borrower cannot.

This type of mortgage solution often enables someone to obtain a mortgage loan, even with a poor credit score or little to no deposit.

The guarantor, usually a parent or a close family member, provides extra security for mortgage lenders, often through savings or property deeds.

How guarantor mortgages work

Eligibility criteria

To get a guarantor mortgage, the borrower must meet specific criteria. These include but are not limited to, a stable income, proof of employment, and sometimes a minimum income threshold.

A good credit history is not always necessary, but lenders will scrutinise past payment history and current financial status.

Process and requirements for guarantors

The guarantor must provide proof of their financial stability, including a good credit score and sufficient equity in their property. They must understand the legal documents they sign, indicating they are jointly liable for the mortgage repayments.

Independent legal advice is strongly recommended to ensure the guarantor fully comprehends the financial link and responsibilities involved.

Securing a guarantor mortgage with credit challenges

Guarantor mortgages present a feasible solution, offering a pathway to homeownership despite past financial missteps. The presence of a guarantor can mitigate the perceived risk lenders associate with a lower credit score.

Strategies for obtaining a mortgage with a guarantor

Strategies include demonstrating improved financial habits and securing a guarantor with a strong credit history. Lenders assess the guarantor's ability to cover mortgage payments, which can be a decisive factor in approval.

Interest rates and guarantor mortgages

Interest rates for guarantor mortgages might be elevated compared to standard mortgages. It's essential to compare rates across the market to ensure you find a cost-effective option that aligns with your financial plans.

Assessing if a guarantor mortgage is right for you

Guarantor mortgages ease the path onto the property ladder for those with a low income or little to no deposit.

These mortgage solutions enable the borrower to purchase their own home, potentially up to 100% of the property's value, by involving a guarantor.

The guarantor's savings or property serve as security, offering a way to secure a mortgage deal that might otherwise be out of reach.

Potential risks and how to mitigate them

When engaging in a mortgage with a guarantor, the borrower must maintain regular monthly repayments. Failing to do so not only affects their credit history but also places financial strain on the guarantor.

Seeking advice from an independent mortgage broker can provide tailored mortgage solutions to fit the borrower's financial situation.

Implications for the guarantor

The guarantor's role involves a significant commitment; they become legally responsible for the borrower's debt if repayments fall behind.

Guarantors must understand the lender's policy on when they step in and the long-term risks involved, such as claims on the guarantor's home or savings account.

Guarantors should seek legal advice to fully grasp their responsibilities and the ramifications for their own mortgage and savings.

Advantages of choosing a guarantor mortgage

Guarantor mortgages offer a path to home ownership when saving a deposit challenges you.

Many lenders allow you to borrow up to 100% of the property's value, provided a guarantor backs the loan.

This backing typically from family members, can unlock higher loan amounts, sometimes termed as Joint Borrower Sole Proprietor (JBSP) mortgages, enabling you to climb the housing ladder faster than you might on your own.

The downsides

With a mortgage with a guarantor, you're not just responsible for monthly repayments; you're part of a partnership where both you and your guarantor share the financial duty.

If repayments falter, the guarantor's estate could be at risk. You need to manage finances prudently, maintaining open communication with your guarantor and most lenders involved.

Setting up a special savings account to serve as a buffer for repayments can further safeguard against unforeseen financial hiccups.

The guarantor should ensure they have enough equity in their property or savings to feel comfortable with the arrangement.

Financial implications of guarantor mortgages

What happens with mortgage repayments

A guarantor mortgage alters repayment terms. It involves a family member using their savings as security, enabling the borrower to secure a home loan with little or no deposit.

Such arrangements can lead to preferential interest rates and the possibility of borrowing a larger sum.

What happens if mortgage payments are missed

Missing mortgage payments triggers a series of lender actions. The guarantor mortgage holds both the borrower and the close family member responsible, with possible repercussions affecting the guarantor's assets and credit.

Mortgage lenders may recover the debt from the guarantor, impacting their financial stability and credit score.

What to do in case you face financial difficulty

In financial distress, immediate engagement with the mortgage lender is crucial. Early discussions can lead to solutions that protect both the borrower's and guarantor's interests and prevent further financial strain.

Types of guarantor mortgages available

1. Joint borrower sole proprietor mortgages

A joint borrower sole proprietor mortgage involves a family member, such as a parent, joining the mortgage to bolster the borrowing capacity. This type of home loan allows for a bigger mortgage by combining incomes without adding the supporting family member to the title deeds.

This structure can be beneficial when parents assist their children in purchasing a property, enabling the child to benefit from the parents' financial stability.

2. Guarantor mortgages with savings as security

Mortgage guarantors can use their savings to secure a home loan. These savings earn interest yet act as an assurance for other lenders offering guarantor mortgages. The arrangement typically locks the savings until certain terms of the mortgage are met.

In this scenario, the guarantor's savings serve as a buffer for lenders. If the borrower fails to make payments, the savings may be used to cover the shortfall.

3. Using property as security for a guarantor mortgage

Homeowners can leverage their own home as security for a guarantor mortgage. This commitment allows the borrower to access credit that may otherwise be unavailable due to bad credit or other financial limitations.

When a property is used as security, the guarantor risks their title deeds if the borrower defaults. The guarantor's home may be at stake if the loaned amount is not repaid according to the mortgage terms with the lender.

Alternatives to guarantor mortgages

Family deposit and offset mortgages

Family deposit mortgages involve a family member depositing funds into a linked account, which serves as security. Offset mortgages allow savings to offset the mortgage balance, reducing interest payments. Both options can provide financial leverage without the need for a guarantor.

Government schemes for first-time buyers

First-time buyers in the UK have access to government schemes aimed at easing the property purchase process. These schemes include Help to Buy, Shared Ownership or joint mortgage, and the First Homes programme, each designed to support individuals with lower deposits or incomes in securing a home.

FAQs

Can a guarantor mortgage improve my credit history?

Consistent, punctual repayments on a guarantor mortgage reflect financial reliability, bolstering your credit score. Lenders regard this as evidence of creditworthiness, which can facilitate future borrowing under more favourable conditions.

Is it possible to borrow 100% of the property value?

Guarantor mortgages offer the potential to secure a loan for the full value of a property. Lenders assess the guarantor’s financial health and willingness to underwrite the loan, which could enable you to borrow without a deposit.

What are the legal implications for a guarantor?

Accepting the role of a guarantor carries significant legal responsibilities. Should the borrower default, the guarantor is legally obligated to assume the mortgage repayments, and their assets may be at risk to settle the debt.

What happens if my guarantor dies?

While it's a difficult topic to consider, it's important to plan ahead. The lender will decide the next steps, which could involve finding a new guarantor or using funds from the guarantor's property to pay off part of the mortgage.

How can I choose the right mortgage lender for guarantor mortgages?

To find an appropriate mortgage lender, scrutinise their guarantor mortgage products, examining the fine print on interest rates, repayment schedules, and the flexibility offered. Seek feedback from customers in similar financial situations.

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