Buying a first home can be challenging, with rising property prices and stricter lending criteria making it difficult for many first-time buyers to secure a mortgage. For those without a large deposit, strong credit history and high income, guarantor mortgages may provide a viable alternative. This type of mortgage allows a family member or other trusted individual to step in as a guarantor. This article explores how a mortgage with a guarantor works, who they are suitable for, what it entails and what risks are involved.
What Are Guarantor Mortgages?
Guarantor mortgages provide a way for individuals with financial constraints to secure a home loan. When the borrower applies for the loan, a third party, usually a relative, agrees to guarantee the mortgage payments if the borrower fails to pay.
Typically, there are two ways in which the guarantor for a mortgage loan can provide security to the lender. The first is their property as security and the second is their savings as security.
- Property as security: In this format, the guarantor offers their own property as collateral. This means that if the borrower defaults and the lender cannot recover the money owed, the guarantor’s property could be repossessed. While this provides a high level of security for the lender, it also implies a significant risk to the guarantor.
- Savings as security: The alternative is savings as security, under which the guarantor may deposit a portion of their savings, typically between 5-20% of the property’s value, into a special account linked to the mortgage. These funds become locked for a set period and can be used to cover missed mortgage payments should the borrower fail to pay.
In both cases, there are risks involved for the guarantor. While a house loan guarantor provides the borrower with access to a mortgage, the guarantor must understand the nature of the commitment before entering into any agreement.
Why Use Mortgages with a Guarantor?
Guarantor mortgages are valuable for individuals who would otherwise struggle to secure a home loan. They are most commonly used by first-time buyers who may not have the ability to build up a large deposit or establish a strong credit history.
House loan guarantor arrangements can also assist those with lower or irregular incomes, such as self-employed individuals or younger employees just starting their careers, who would be rejected under traditional lending criteria. The guarantor for the mortgage loan provides additional financial backing that gives the lender confidence that the mortgage payments will be made.
Who Can Be a Mortgage Guarantor?
In most cases, guarantors are parents or close older relatives who have a stronger financial standing. Importantly, there are additional eligibility requirements for a guarantor for a mortgage loan. Some lenders will only accept individuals who already own their own property outright, while others may allow guarantors with a significant amount of equity in their own property, usually more than half of the mortgage value. Being a homeowner is often a condition and if the guarantor has their own mortgage, they must be able to demonstrate that their income is high enough to cover both sets of mortgage payments. For retired guarantors, lenders may ask for evidence of savings or other assets as collateral. A strong credit history is also essential.
Using a Mortgage Broker
Working with a mortgage broker can make the process of obtaining a guarantor mortgage easier. A broker will analyse your and your guarantor’s income, savings and overall financial situation to match you with lenders offering the most suitable products.
Whole-of-market brokers have access to deals and products across the mortgage market and can therefore present you with a list of options that best suit your circumstances. Once you have chosen a product, they will be able to guide you through the application process, ensuring you avoid mistakes that could result in rejections or delays. Applying for the wrong mortgage product or applying incorrectly can result in being turned down by a lender, which can impact your credit file adversely and make it more difficult to get approved in the future.
Alternatives to Guarantor Mortgages
If mortgages with a guarantor are not the right option, low deposit or low-income borrowers could consider alternative products and schemes, such as:
- Family deposit and family offset mortgages: With a family deposit mortgage, a relative places savings into an account linked to the borrower’s mortgage. If the borrower cannot meet mortgage payments, the savings can be used by the lender as collateral. With a family offset mortgage, the same process is used, where a relative places money into an account. In this situation, the money reduces the balance of the loan used to calculate interest, which can lower monthly repayments.
- Government support for first-time buyers: There are certain government schemes designed to help buyers who might be struggling to build up a deposit. These include:
- Lifetime ISA, which offers a 25% bonus on savings when used for a first home or retirement.
- Shared ownership, which allows you to purchase a share of a property and pay rent on the remaining portion, which lowers the required deposit.
- First Homes scheme, which lets eligible buyers in England purchase designated homes at a discount of 30-50% off market value.
Conclusion
Guarantor mortgages offer a route to homeownership for aspiring buyers who lack credit history or a deposit, or struggle with income constraints. For those with supportive family members and willing guarantors, mortgages with a guarantor can be a viable path to owning property. However, there are real risks involved for the guarantor. It is essential that all parties seek independent professional advice before entering into such an agreement.
FAQs
Q. How do guarantor mortgages work?
A. A guarantor mortgage allows a borrower to take out a home loan with the support of a guarantor, usually a parent or close relative. The guarantor agrees to cover payments if the borrower misses them, using either their property or savings as security.
Q. Which banks offer guarantor mortgages?
A. Several high street banks and building societies offer guarantor mortgages, although availability has become more limited in recent years. Lenders typically require the guarantor to be a homeowner with sufficient equity or someone with substantial savings.
Q. What is a mortgage guarantee scheme?
A. A mortgage guarantee scheme is different from a guarantor mortgage. Instead of involving a private individual, the government provides lenders with a form of insurance, allowing them to offer mortgages to buyers with smaller deposits of usually around 5%.
Q. What does a guarantor for a mortgage loan need to provide?
A. A guarantor must usually provide proof of home ownership or significant savings, demonstrate a strong credit history and show they have the financial means to step in if required. Independent legal advice is also often a condition of the agreement.
Q. Can a house loan guarantor be released later?
A. Once the borrower has built up enough equity in the property and can meet affordability requirements on their own, the guarantor can usually be released from the arrangement through refinancing or a review by the lender.
Q. Who can act as a guarantor?
A. Most lenders expect guarantors to be close family members, such as parents or grandparents. They must typically be over 21, financially secure and homeowners themselves, although requirements vary by lender.
Q. How much can I borrow with a guarantor?
A. The amount you can borrow depends on your income, the guarantor’s financial position and the lender’s criteria.
Q. What happens if the borrower defaults?
A. If the borrower cannot meet payments, the guarantor is legally responsible for covering the shortfalls. This could put the guarantor’s property or savings at risk.
Additional Sources:
https://www.money.co.uk/mortgages/guarantor-mortgages
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