
What is a guarantor mortgage?
We break down guarantor mortgages, explaining how they work and the things you need to know before applying.
We break down guarantor mortgages, explaining how they work and the things you need to know before applying.
Find an adviserWhat is a guarantor mortgage?
Getting a foothold on the property ladder can be hard, especially for people with limited financial resources. A guarantor mortgage could give you a leg up if you’ve got a low credit score or you don't have enough money for a deposit, but there are some risks to be aware of and other options that may be more suitable. Let’s get into the details.
What is a guarantor mortgage?
A guarantor mortgage involves someone else – a guarantor – agreeing to take responsibility for repayments if you can’t make them by using either their savings or property to secure the loan.
Your guarantor is normally a direct relative, although some lenders might consider other family members or close friends. They won’t own any share in the property you’re buying and, if you make all your repayments, they’ll never have to do anything.
Guarantor mortgages can be a good option for people with little (or no) deposit, a low credit rating, less reliable income or other barriers to borrowing.
However, guarantor mortgages are becoming less common because many lenders prefer joint borrower sole proprietor (JBSP) mortgages, a modern arrangement where multiple people take out a mortgage loan but only one person is listed as the legal owner of the property. JBSP mortgages are also designed to boost your borrowing power, but they involve loved ones using their income to help you rather than their property or savings.
Who can be a guarantor?
Lenders often ask for your guarantor to be a parent, but they might accept other relatives or close friends in certain circumstances.
Your guarantor must be at least 21 years old, and many lenders specify an upper age limit to increase the likelihood that your guarantor will be around for the entire term of the mortgage.
Guarantors also need a good credit history and the ability to cover your repayments with their savings or their property. They typically need to own all or most of their property outright if they’re using it as security.
Your guarantor may not need to be on your mortgage for the entire term. If you consistently make your repayments in full and build up equity in your home, you can speak to your lender about removing your guarantor.
What are the different types of guarantor mortgage?
There are two types of guarantor mortgage: savings as security and property as security.
Savings as security
A savings as security mortgage involves your guarantor depositing a lump sum into a bank account held by the lender. The sum is usually between 5% and 20% of the value of the property.
The savings still earn interest whilst they’re held by the lender, but your guarantor won’t be able to access them until your mortgage is close to being paid off.
If you miss any repayments, the lender will either hold the savings until they recover the missed payment from you or sell the property and use the savings to cover any shortfall.
Property as security
A property as security mortgage uses your guarantor’s property as security. They usually need to own their property outright or be very close to paying off their mortgage. If you miss your repayments and your home is repossessed, your guarantor’s property could be sold to cover any shortfall.
What are the advantages of guarantor mortgages?
The main advantage of a guarantor mortgage is that it increases your chances of getting onto the property ladder if you have limited financial resources.
By financially linking yourself to someone with a higher credit score and more money, you’re reducing the risk to lenders and making it more likely that they’ll accept your application.
A guarantor mortgage could also help you secure a bigger loan or better rates, enabling you to buy a home that you might otherwise have been unable to afford.
What are the risks associated with guarantor mortgages?
Guarantor mortgages come with some potential risks, particularly for the guarantor. They’re responsible for covering missed repayments over the entire term of the mortgage. If their circumstances change and they’re no longer able to afford it, a guarantor mortgage could become a real burden if repayments aren't made.
Your guarantor loses some control over their financial profile because their credit score is linked to your loan. Their credit rating could go down if you miss your repayments.
Any savings your guarantor uses to secure the mortgage will be out of reach until most of the mortgage has been paid off, so they could be locking a significant sum away for decades. In the worst possible scenario, a guarantor could lose their home if it's used as collateral.
Guarantor mortgages create a financial relationship between you and your guarantor alongside the emotional relationship you already have. If things go wrong, it could put serious strain on your family.
Tips for applying for a guarantor mortgage
As with all mortgages, lenders will want to take a good look at your financial situation before offering you a guarantor mortgage. You’ll need all the usual documentation to prove who you are, how much income you receive and what your spending history looks like, and it’s a good idea to boost your credit score as much as you can.
But the involvement of a third party (your guarantor) usually means there’s a few extra steps involved. You’ll need to provide proof of your relationship with the person who will guarantee the mortgage, and your guarantor will need to supply detailed financial information to prove their ability to cover missed repayments.
Some lenders may need proof that your guarantor has sought legal or financial advice to ensure they understand the risks involved. Every lender has different requirements, and some may be more stringent than others.
Buy a home with help from your loved ones
Whether you opt for a guarantor mortgage or a JBSP mortgage, good communication throughout the process is key. It’s important that both you and your supporters understand the pros and cons of the product you choose, that you’re entering into an arrangement in good faith and that you’re confident in the long-term strength of your relationship.
It’s worth seeking advice to make sure you’re both on the same page. Applying for a mortgage can be a difficult process and tailored support can help make sure that you choose the right solution for both you and your supporters.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
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