A guarantor mortgage is a type of mortgage arrangement where a third party, typically a family member or close friend, agrees to take financial responsibility for the mortgage if the primary borrower is unable to meet their repayment obligations.
The guarantor essentially acts as a safety net for the lender, offering additional security in case the borrower defaults on their payments.
Guarantor mortgages are particularly popular for first-time buyers in the modern mortgage climate, as they may help boost affordability and keep down interest rates.
Types of Guarantor
A guarantor is usually a friend or relative that meets the mortgage requirements who can endorse your debt.
Parents and grandparents tend to be the most common guarantors of mortgages because they’re more likely to own their own homes, have higher income, and/or greater liquid cash stores.
Having an individual with stable financial circumstances and savings of their own take partial responsibility for your mortgage can help assure the lender that payments won’t be missed.
How Does a Guarantor Mortgage Work?
It’s important to note that while your guarantor takes partial financial responsibility for your mortgage, it’s not considered a joint mortgage.
You will be the sole proprietor of the home you purchase, but a guarantor can help offer additional financial security if you are struggling to secure a mortgage.
Guarantor mortgages progress like other mortgages, they’re simply secured against a different individuals’ interests.
You remain primarily responsible for keeping up with your payments – and your affordability will still be assessed – but this is also passed onto your guarantor.
The process begins with a thorough assessment of your own income, deposit, and credit score.
These are used to gauge your initial risk profile, which the bank will then assess the same factors for your guarantor.
If the lender accepts your mortgage application, they will offer you a decision-in-principle) which you can use to put an offer on a home.
Types Of Guarantor Mortgages
Just like other mortgages, guarantor mortgages can have different structures.
These provide flexibility if you find that one or another isn’t the right fit, and you want a financial product that is more closely suited to your needs.
Income boost – joint guarantor, sole proprietor mortgage
Income boost mortgages – or joint guarantor sole proprietor mortgages – are a way of boosting income on a mortgage.
This is often used to support your regular mortgage repayments, tying your guarantor into the process.
It can be a good way to keep your interest rates reasonable without using any additional assets as collateral for your mortgage.
There’s only a risk to the sponsor if you don’t keep up with repayments, after which they will be legally required to make up the shortfall.
And as you build up equity in your home, you can remove your guarantor from the mortgage.
Savings (or Security) Guarantees
Savings or security guarantees are used to combine your deposit with a secured cash amount in your guarantor’s possession.
This typically involves up to 10% of the property value from a sponsor, and up to 10% from your own capital upfront.
This reduces the amount of interest you’re paying on the mortgage, and your sponsor will have their funds returned under a set of conditions.
These could involve repayments, changes to income, or simply passing a threshold of loan-to-value on your property.
Property securitisation secures your mortgage against another individual’s property to provide additional collateral and offset risk for the lender.
It has become more common in recent years as a way for older parents with equity in their own homes to help their children access the property ladder.
This is held against your mortgage repayments and can be used to repossess a property (or some portion of its value) from your guarantor if you can’t keep up with your mortgage payments.
An advantage of this is that you may not be required to provide a large deposit.
Gifted Deposit Boosts: An Alternative to a Guarantor?
A gifted deposit refers to a sum of money that is given to a homebuyer by a family member, usually a parent or close relative, to be used as part or all of the deposit required when purchasing a property.
The gifted deposit is intended to help you meet the financial requirements of securing a mortgage and buying a home.
Lenders will typically require you to contribute a certain percentage of the property’s price to demonstrate your commitment to the purchase and reduce the risk.
But if you’re struggling to save for a sufficient deposit, a family member could offer a ‘gifted’ deposit to help boost your eligibility.
This can make homeownership more accessible for individuals who might otherwise struggle to accumulate the required funds.
It can be a popular choice for those who want to support a loved one’s mortgage viability and affordability, without taking out huge risks along the way.
It's important to note that when a gifted deposit is used, the lender typically requires a written declaration from the family member providing the gift.
This declaration verifies that the money is a gift and not a loan that needs to be repaid.
The family member might also need to provide evidence of the source of the funds to ensure compliance with anti-money laundering regulations.
Each lender may have their own specific requirements and policies regarding gifted deposits, so it can be advantageous for both the homebuyer and the family member providing the gift to communicate with the lender and follow their guidelines accordingly.
Guarantor mortgages have grown more common in the current economic climate, especially among young people struggling to get on the property ladder.
However, in the past, guarantor mortgages have been reserved for individuals with poor or patchy credit ratings.
While a guarantor mortgage does present certain risks, they can be a helpful option if you are struggling to secure a good mortgage deal.
But a guarantor mortgage isn’t necessarily your only option. Especially if you have good credit and manage your finances well.
If affordability is something you are concerned about, it’s worth discussing your options with an experienced broker.
At Fair Mortgages, we work with exceptional industry professionals who can offer you tailored financial advice.
Call us on 0117 403 4474 to see what we can do for you.
Or look at our guarantor mortgage comparison tool to see what type of products could be available to you.
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Some lenders offer guarantor mortgages, which can provide an option for first time buyers who are struggling to get on the housing ladder. This mortgage option allows one of your close relatives, usually a parent, to provide a guarantee for the loan.
A guarantor mortgage is where a parent or close relative acts as financial security for a first time buyer buying a home who would not otherwise be able to get a mortgage on their own. When you become a mortgage guarantor you take on responsibility for someone else's mortgage repayments should the main mortgage holder not be able to meet this financial commitment.
How does a guarantor mortgage work?
The guarantor needs to be prepared to meet your mortgage repayments in the event that you are unable to.
This type of mortgage may mean you can borrow more funds than your income would normally allow, providing you can cover the repayments on your current income. Lenders are able to offer more money towards this type of mortgage because they have combined incomes supporting the loan.
In order to get this type of mortgage, the guarantor will need to demonstrate that they have the means to make the mortgage repayments in addition to their own outgoings each month.
Things to be aware of:
If the buyer defaults on mortgage payments, the guarantor will be liable. If they are unable to meet the payments themselves, they could find themselves in difficulty. In the worst case scenario, this could lead to your own home being repossessed to cover the mortgage that you are guaranteeing.
The guarantor mortgage is taken out in the purchaser's name only. Although the guarantor has now stake in the property themselves, their income is used to guarantee the mortgage borrowing, which is a major commitment and one that needs careful consideration.
Agreeing to act as a guarantor is a contractual obligation and very difficult to get out of should disputes arise. Many guarantor mortgage lenders require both borrower and guarantor to seek independent legal advice before they commit to the mortgage.
Some lenders require the guarantor to cover the entire mortgage amount, while others only require the guarantor to cover the shortfall on the mortgage, i.e. the amount that you are unable to afford yourself.
Several mortgage lenders have recently brought out an alternative to guarantor mortgages called family offset mortgages.
With this type of mortgage, the person helping with the mortgage puts a lump sum into a savings account that is linked to the borrower’s mortgage. The savings balance effectively serves as part of the deposit on the property the borrower wants to buy.
For example, one UK lender offers a mortgage where the helper is required to put 10% of the property purchase price into the savings account, which then means that the buyer only needs an additional 5% of the purchase price to get a 15% loan to value (KLTV) mortgage. After 3 years, the helper gets their money back, plus interest, provided that repayments on the mortgage have been kept up to date.
This type of mortgage could be suitable for parents or relatives who want to help a first time buyer buy a home without spending their savings on the deposit, or taking on the responsibilities of acting as a guarantor.
However, it’s important to be aware that the savings held in this type of account may be treated differently from normal savings accounts – for example, they may not be protected under the Financial Services Compensation Scheme (FSCS) if the lender defaults. As with a guarantor mortgage, most lenders will ask you to seek independent legal advice as a condition of taking out this kind of mortgage.
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Guarantor Mortgage FAQs
With so many options – both for mortgage structure and possible sponsors – it can be important to get the right perspective before you start shopping for mortgage offers.
Here are some of the most common questions we receive about guarantor mortgages, and the key details you may find helpful.
Who can be a guarantor on my mortgage?
Anyone can be your guarantor, but the 4 most common are:
· Parents or grandparents
· Close friend
Parents tend to be the intuitive option, but those with very close grandparents, siblings, or friends are also able to provide guarantees.
Are guarantor mortgages a good idea?
Whether a guarantor mortgage is a good idea or not depends on your specific financial situation and goals.
Guarantor mortgages can be beneficial in some circumstances, but they also come with risks and considerations.
When used in the right circumstances, guarantor mortgages can be a great way to boost your eligibility, affordability or keep your interest rates relatively low.
What are the requirements for a guarantor mortgage?
A guarantor mortgage requires you to be continually employed, with a strong salary (relative to the cost of your property), and a guarantor with the same.
Eligibility of the Borrower:
You’ll typically be required to be a first-time buyer or have a limited credit history.
You’ll need to demonstrate the ability to make mortgage payments, including having a stable income.
You’ll need to meet the minimum deposit requirement
The guarantor (the person providing financial support) must have a strong credit history and a good credit score.
The guarantor typically needs to be a close family member, such as a parent or grandparent, but some lenders may accept non-family guarantors.
The guarantor should have sufficient income or assets to cover the mortgage payments if the borrower defaults.
Some lenders may require the guarantor to undergo a financial assessment to ensure they can meet their obligations.