A guarantor mortgage is often used when someone attempts to get a mortgage or get on the property ladder with no/little deposit. Or, if they have bad credit.
A guarantor (that can be a parent, relative, family member or even a close friend) is someone who will cover mortgage repayments if you cannot pay them yourself. They can help you get a home loan by providing the lender with some security. Guarantor mortgages are popular with first-time buyers and people who are struggling to move due to poor credit.
How does a guarantor mortgage work?
It works by having a close family member or a trusted friend guarantee the mortgage with their own assets or savings as security. Usually, the guarantor can guarantee 75% or 80% of the mortgage, but can also agree to guarantee 100%. This would mean you do not need a deposit.
However, acting as guarantor can be risky. The borrower and the guarantor are jointly responsible for the mortgage repayments. If the payments are not met, the lender could repossess your home and sell it. If your property does not cover what you owe, it can be taken from your guarantor’s savings or even property.
Who may benefit from a guarantor mortgage?
A guarantor mortgage may benefit you if you fulfil any of the following:
- A low income – if you don’t earn enough to meet the bank or building society’s lending criteria.
- A small deposit – often, lenders need you to put down a deposit. Normally, deposits are up to 25%. If you get a guarantor mortgage, it could be possible to borrow up to 100% of the property’s value.
- Poor credit score – a lot of people unfortunately do not have the best credit score. It prevents them from having a mortgage by themselves. You may have bad credit if you have missed any repayments in the past.
- No credit history – if you are new to the country, or not been able to build a credit history, you may not be able to show you are reliable enough to make repayments.
Who could be a mortgage guarantor?
Most lenders prefer the mortgage guarantor to be someone trusted, so parents, grandparents or other close family members. However, there are very strict eligibility requirements:
- The guarantor needs to have their own property or their own savings. This shows that they are capable of making regular repayments. And having the asset that could cover the cost of your mortgage if needed.
- They need a good credit history. This shows the lender that they are financially stable and reliable.
- They also need to receive legal advice on the risks of being a mortgage guarantor. They need to fully understand the risks and the legal requirements that they are committing themselves to.
Every lender is different. Some will settle for a guarantor that owns a certain amount of their property. For example, if they own over 50% of it. While other lenders will insist that the guarantor owns their property in full and has paid off their mortgage.
What if the borrower and the guarantor can’t pay?
This is a rare occasion as the lenders usually carry out thorough and detailed investigations regarding the guarantor’s ability to keep up with repayments. However, on the off chance that it does happen and the guarantor is unable to make payments on time, your lender will examine why they cannot pay. If a guarantor simply refuses to pay due to personal reasons (for example, a family arguments), the lender could take legal action against them and their property could be at risk, as they would have breached their contract.
If both the borrower and the guarantor can’t make repayments (for example, a change in financial circumstances) they are breaking the agreed contract and the consequences can be very serious. The lender will take legal action against both. The lender wants to have full trust in who they are lending to.
If you’re honest with your lender, they should find the best solution for you and your circumstances. They will discuss your situation with you and advise you on the next step of your journey to a mortgage. Speak to a financial adviser who can explain your options and find you the right mortgage scheme to suit you and your needs.
Help to Buy
Government Help to Buy Scheme
The government backed helped to buy scheme is only available to first time buyers who are buying new build homes. The maximum price of the property you can borrow for depends on the region you are buying in which varies significantly. They can start at £186,100 in North East and climb to a much greater £600,000 in London. However, using this scheme, first time buyers don’t need to gather a large deposit. Instead, all you need is a 5% deposit of the properties value. If you are able to provide the 5%, then the government will pay an extra 20%. This will give you a total of 25% mortgage deposit. This can massively effect many aspects of a mortgage offer, potentially leading to more favourable interest rates, smaller repayments and much more. For more information click on the Help to Buy Scheme link at the bottom.
Private Help to Buy Scheme
This is a new scheme that helps you climb up the property ladder. Unlike the government help to buy scheme, this includes previously owned properties, not just new builds. It gives first time buyers a far larger range of properties to choose from. It is not the government backed help to buy scheme and it is a fully independent product. Borrowers may be able to borrow more with this scheme if they do not qualify for a 95% LTV mortgage and only a 5% deposit is needed; a further 25% towards the purchase price can be borrowed through a secured loan. This means the borrower can take out a 70% LTV mortgage at a far lower rate. It is cheaper, as the rates on a 70% LTV mortgage are far lower than a standard 95% mortgage. The loan is an interest only basis which also helps reduce the monthly payments and more borrowers may qualify. However, as the loan is interest only, this means you won’t be repaying the mortgage, and so your share in the property won’t increase. Click the Help to Buy Schemes link at the bottom to find out more.