Guarantor mortgages explained

Guarantor mortgages help you get on the property ladder if you are struggling to find a deposit by using a close friend's or family's property as collateral to cover mortgage payments.

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What is a guarantor mortgage?

A guarantor mortgage allows you to secure a mortgage when you don’t have the funds or financial circumstances to put down a large deposit. A close friend, parent or another close family member guarantees to cover mortgage payments if you are unable to pay and this is secured against their property.

Whoever you choose to be the guarantor, they will not own a share of the property nor will they be named on the property deeds. It is simply a legal agreement to cover mortgage repayments in the event that you are unable to pay. It is a popular choice for parents who want to help put their children on the property ladder.

Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.

What is a family guarantor mortgage?

A family guarantor mortgage involves a type of guarantee that can be made to secure a property. A parent or other close family member guarantees to cover mortgage payments, and this is secured against their property.

How does a family guarantor mortgage work?

A guarantor mortgage allows you to use the equity in your parents’ property or another family member’s property as security on a mortgage. Guarantors are limited to immediate family members, including parents, grandparents and siblings.

  • How much do they have to guarantee? Most lenders prefer a 20% deposit resulting in a loan-to-value (LTV) ratio of 80%. This makes it more likely that you’ll be approved for the mortgage and also receive a favourable interest rate, which well help keep the monthly repayments affordable.
  • What can be bought with a family guarantee? The family guarantee can be used to buy a home or invest in residential property so buyers will be able to use normal mortgages and buy-to-let mortgages.

Reasons some borrowers choose a guarantee mortgage

  • Starting a new job. If you’ve just graduated and recently acquired a job in your field you may not have the salary and subsequently the buying power necessary to purchase a home. This is where a guarantor mortgage might be able to help. These mortgages will help you to buy a house while waiting for your income to increase. When your income is higher then you can pay off your mortgage a little faster.
  • Getting on the property ladder. For some, buying a house may be more financially prudent compared to renting. While buying a house is a major commitment and comes with more upfront and maintenance costs, it may be better off in the long run as instead of spending money on rent, which you will never get back, you’re repaying a mortgage and building equity that you can cash out if you sell your property.

How much can I borrow for a mortgage with a guarantor?

You can borrow up to 100% of a property’s value with a guarantor mortgage, depending on the type of mortgage chosen (traditional guarantor mortgages, family deposit mortgages, family offset mortgages and family link mortgages), with the most you can borrow in cash terms, £500,000.

This means that you will have to pay only a small deposit, or nothing at all, depending on how much of the property’s value you are borrowing.

Who can be a guarantor on a mortgage?

A family member or even a friend can be your guarantor, but some lenders will restrict who you can choose. Some will only accept a parent, grandparent or step-parent, for example.

Your guarantor will also need to:

  • Own their own property outright or have enough equity in it to meet the lender’s minimum.
  • Have a high enough income to help cover your repayments if needed, while still being able to keep up with their own finances.
  • Have a strong credit record so the lender is satisfied they are financially stable.

Tips for entering into a guarantor mortgage

  • Make sure you have a good relationship with your guarantor and you both understand the financial commitments involved. If you personally get into trouble paying your mortgage then both your credit scores could be affected.
  • Think about your future earning prospects. If your income has not increased sufficiently by the time remortgaging comes around, you may still need to keep your guarantor involved.
  • Research the market or use a broker to find the best guarantor mortgage for your personal circumstances.

What happens if I miss a payment?

Depending on the terms of your mortgage, if you personally start to fall behind with your mortgage payments you may be given more time to pay or charged a fee. However, with a guarantor mortgage, another option is that your guarantor could be asked to cover these payments for you.

Should you continue not to make repayments, there could be more serious consequences. If you have the type of mortgage where your guarantor has savings ‘locked in’ to an account associated with your mortgage, your provider may take the funds from there.

In the worst case scenario, your home could be repossessed and sold by your lender. But if the property is sold for less than the balance of your mortgage, your provider will turn to your guarantor to meet this shortfall in funds, which could result in them losing some of their savings or having a debt claim put in on their own property.

Pros and cons of guarantor mortgages

Pros

  • These type of mortgages enable your parents or another family member to help you buy a home.
  • As a first-time buyer you can get a foot on the property ladder without needing a large deposit.
  • You may be able to secure a higher loan amount (and therefore a better property) because of your guarantor’s income or property assets.
  • If you have a poor credit score or a thin credit history, a mortgage provider may be more inclined to lend to you if you have a guarantor.

Cons

  • Your guarantor could become liable for the mortgage should you not be able to meet your monthly repayments.
  • The age of your guarantor could shorten the length of the mortgage term offered to you.
  • Your guarantor’s ability to remortgage their own home or purchase another property would be affected by their financial commitment to your mortgage.
  • Family relationships could be put under strain should any unexpected financial difficulties or jointly liable debt situations occur.

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