Getting onto the property ladder is an exciting journey but it can also be a challenging process to get the mortgage you need.
There’s the difficulty of saving up enough money to cover the deposit and costs plus finding a lender that will approve the level of mortgage you need.
If you find yourself in this situation, where your deposit is not quite large enough or your income not quite high enough, then maybe a guarantor mortgage can help.
What is a guarantor mortgage?
Guarantor mortgages are a way for parents or relatives to help borrowers qualify for a higher mortgage than they could get by themselves. Typically this will be a parent assisting their child to apply for a first time buyer mortgage to buy their first home.
They are different from standard joint mortgages with parents as the guarantor/s do not become co-owners of the property.
The guarantor has to agree to be part of the mortgage arrangement and therefore becomes jointly liable for repayment of the mortgage. In the event of the primary borrowers not being able to afford the repayments the guarantor has to take their place.
Having a guarantor provides borrowers with access to guarantor mortgage lenders and a greater choice of mortgage options. This could mean being able to borrow more money or gaining a better rate of interest.
You will find more useful information in our article: How do joint mortgages work?
Who can be a guarantor?
Each lender will have their own rules covering the type of person they will accept as a guarantor. All banks and building societies will be happy with a close relative such as a parent, or maybe a grandparent as they want to be confident that they can rely on the guarantor to support you for a long time.
Our brokers have access to lenders that will accept the following:
- Parent or Guardian
- Grandparent
- Spouse
- Other close relative
Just as importantly the guarantor needs to have a good, stable financial position. If they have no assets and a low income they will not be acceptable to the lender.
Parents or older relatives are a good choice as they will often have a good credit profile, larger disposable income and be a homeowner.
A guarantor will need to:
- Be a homeowner
- Have either no mortgage or a low LTV mortgage
- Good credit history
- Disposable income sufficient for the mortgage repayments
If they still have a mortgage the lender will want to confirm the amount of equity they have and their disposable income. The equity situation will need to comfortably be able to cover the mortgage balance in the event of a mortgage default. Their income after all living costs needs to be able to afford the new mortgage payments.
As homebuyers are starting their property journey later in life, the age of the guarantor is becoming increasingly relevant. You should be aware that if the mortgage is due to end after their 65th birthday then additional underwriting will be needed. Primarily this will relate to pension income, and/or assets, because you are guaranteeing the mortgage payments into retirement.
You will see that a guarantor has to pass the same set of validation rules as the main borrower/s. Only once this is confirmed will the lender be happy.
A Guarantors Role
Your guarantor will need to be able to take your ‘place’ if you cannot keep up the monthly repayments. In the worst case this will be until the end of the mortgage term. They will also need to have sufficient equity or savings to fully repay your mortgage should the lender go for repossession.
This means that the lender will take a legal charge over their home which will then put it at risk.
When you apply for the mortgage the guarantor will be noted as an additional party to the mortgage, so that the obligations above can be fulfilled. However, they do not own any of your property and will not be mentioned on the deeds to the property.
While a guarantor needs to have a healthy credit file there are no minimum income requirements. Instead the lender will assess each case individually. If they only have a modest income then the security of their home will need to be very strong.
Who would benefit from this type of mortgage?
Unsurprisingly, it is first-time buyers that take advantage of guarantors more than other types of borrowers.
Getting on the property ladder is difficult enough but some people need just a little bit of extra help in the early years.
You could benefit if:
- Your income is too low for the mortgage needed
- You have a small or possibly no deposit
- You have some bad credit
- You have a thin credit file (not much credit history)
Students!
In certain situations a university student can buy a house to live in, rather than pay extortionate rents.
But as most students don’t earn any real money they need some help…
A student mortgage, or buy for uni mortgage, is a buy to let mortgage with a guarantor.
The guarantor boosts the financial side of things to keep the lender happy. They will even allow you to rent some rooms out to your mates.
Read more: Mortgages for students
CONTACT A MORTGAGE BROKER
If you are ready to take the next step then we can put you in touch with a fully qualified independent mortgage broker.
How do guarantor mortgages work?
Well the mortgage part of the arrangement will be the same as any moving home mortgage.
Repayment method
The normal choice between a repayment mortgage or an interest only. Most borrowers in this position will be choosing repayment.
INTEREST RATES
Depending on the lender a choice of; fixed rates, tracker rates or discounted rates. Most first-time buyer would choose a fixed rate.
MORTGAGE TERM
For affordability reasons borrowers often choose an initial term of 25-35 years. But the age of the guarantor may affect this.
Behind the scenes there are few differences compared to a normal mortgage.
If the worst happens your home and that of your guarantor could be at risk. This is a very real problem that should be discussed.
The guarantor will be jointly liable for the debt and the repayments. If you don’t pay they have to pay. These terms form part of the mortgage agreement and the lender’s interest (in your property) will be noted as a legal charge on the guarantors home.
Whilst they have responsibilities towards the mortgage, a guarantor does not own any part of the property. This will be reflected in the owners listed at Land Registry.
It can be possible for a guarantor to offer up cash instead of their home. They would have to deposit a certain amount of money into a bank account for a set number of years. Equally it may be possible to discuss a lower liability with the lender. For example, rather than being responsible for 100% of the mortgage, they would cover 50% of the mortgage. You will need to talk this over with your mortgage broker.
Some lenders will refer to guarantor mortgages as; family mortgages, Joint Borrower Sole Proprietor mortgages or springboard mortgages.
What about 100% mortgages?
Prior to the financial crisis of 2008, it was commonplace for lenders to offer 100% mortgages. But then they were removed after the lenders got their fingers burnt.
But with a guarantor in place it could be possible to borrow 100% again.
If they have the equity and are willing to risk it some lenders may offer all of the money. Others will need the guarantor to deposit some funds with them, 10% of the purchase price, to be given back after a fixed number of years.
If possible, it is generally better to put a 5-10% deposit down when you buy a home. It starts you off with some equity and also lowers your monthly mortgage payments.
There’s also the opportunity to use any cash savings that parents may have to make the mortgage cheaper. A family offset mortgage would link savings held by parents to the children’s mortgage.
This can help to make the mortgage a bit cheaper and with some lenders, reduce the cash deposit needed to qualify.
Family deposit mortgage
A family deposit mortgage would also use surplus cash savings from parents or grandparents.
If there’s enough, it can take the place of your cash deposit completely. Effectively, giving you a no-deposit 100% mortgage.
The savings are locked up for a few years with the lender, but they don’t offer an offset benefit.
Joint Borrower Sole Proprietor (JBSP)
That rolls off the tongue nicely doesn’t it!
Joint Borrower Sole Proprietor is the new improved version of a guarantor mortgage, which is almost the same as the old version. It is designed to help borrowers improve mortgage affordability by adding one or both parents to the application as joint borrowers but without adding them to the property deeds as owners.
The parental income is taken into account when assessing the potential mortgage, but the applicant remains the single named owner on the property deeds.
Sounds like a guarantor mortgage so far…
A guarantor mortgage means that someone else, usually a parent, backs you up if you can’t make the repayments. They will only step in to help if you’re struggling. But with a JBSP mortgage, they will help you cover the costs from the start.
With a Joint Borrower Sole Proprietor mortgage everyone is classed as a borrower, this is fundamentally different to the guarantor option. One further change that this new arrangement brings is that mortgage correspondence will be sent to all borrowers, including the guarantor. This would include annual statements, letters concerning rate changes or product renewal letters.
PROS AND CONS
PROS
The primary advantage is for the borrower who is now able to purchase their first property.
It allows people to get on the property ladder who otherwise would not be able to.
It also gives access to a wider range of mortgage deals and higher borrowing limits.
The guarantor’s good credit profile will help to offset any bad credit the borrower may have.
CONS
The guarantor is taking a big risk as they are putting their home on the line. If you default on the mortgage they could lose their home.
You need to find someone who is happy to take this risk and is also in a sufficiently strong financial position that they can improve your mortgage prospects.
You will be tied to the guarantor for a few years, so you must get on!
Finding a guarantor mortgage isn’t always easy, as only a small number of lenders offer them.
FAQ
Frequently Asked Questions
Do guarantors get credit checked?
Yes, they will go through the same process as a borrower.
What if your guarantor dies?
You will need to contact your lender. They may require a new guarantor to be added to the mortgage.
Does the guarantor own part of the house?
No. They are noted on the mortgage deed but do not have ownership of the property.
Who can be a guarantor?
It’s possible for anyone to be a guarantor but lenders prefer close familiy members.
Do you need to be a first time buyer?
No, although first time buyers will often need this type of help more frequently.
Will it allow me to borrow more money?
Yes possibly. With the additional income you could have a bigger mortgage.
