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Guide to Guarantor Mortgages

With house prices skyrocketing, many people will struggle to save enough money to put a deposit on a home. For example, a first-time buyer in London may be looking at properties in the region of £500,000. A typical deposit, in this case, could be as high as £50,0000. 

Most will find raising this amount of money hugely daunting, for others, near impossible. That’s where guarantor mortgages come into play. If you are lucky enough to have someone in your life who can help you get on the property ladder, then this may be the solution for you.

This guide will outline the various guarantor mortgage types, how they work, as well as listing some deposit-raising options.

What is a Guarantor Mortgage?

In the simplest terms, a guarantor mortgage is where a third party (usually a parent) agrees to guarantee a mortgage for their child/relative/friend. This means that the guarantor is liable, should the borrower fail to make the mortgage repayments.

Typically, guaranteed mortgages are sought-out when the borrower either does not earn enough to apply for a suitable mortgage to buy a house, cannot save enough of a deposit by themselves, or may have a less-than-perfect credit score. This could be due to financial mishaps in the past; missed payments on credit cards, loans etc.…

Therefore, the promise of a mortgage guarantor gives borrowers access to a wider range of mortgage options, including the option to borrow a significantly larger sum of money.

Am I Eligible For a Guarantor Mortgage?

• Are you looking to buy a home and lucky enough to have a parent or relative with healthy finances? In order to pass as a guarantor, the lender must check if the guarantor can pay off their outstanding debts, as well as the mortgage applicant’s. In some cases, providers may only ask if the guarantor can cover the shortfall between the what the mortgage applicant can afford and the cost of the home loan.
• Can you, as a would-be homebuyer, pass a basic credit check in order for the lender to be confident that you can pay your own mortgage, unaided? Please note: borrowers can also be young people who have not been able to build up a substantial credit history yet.
• Is the guarantor over the age of 21 with a good credit score and a UK homeowner?
• Is the would-be guarantor someone directly financially linked to you, for example, a partner or spouse? If this is the case, they may not be eligible to be a guarantor.

Let’s Look at a Guarantor Mortgage Example:

Lucy wants to buy a house. She’s single and earns £21,000 a year. Lucy wants to live in East Yorkshire and has gathered together a sizable deposit of £10,000. The properties she is looking at start from £130,000. However, after approaching a few lenders, she was not able to secure a mortgage offer for this amount, as it is more than four times her current salary. One mortgage broker advised her that her potential for growth in earnings may secure her a more suitable mortgage in around five years’ time, but Lucy would like to be in her own place much sooner than that.

Lucy’s father earns £50,000 a year as a business consultant and wants to help his daughter settle into a home of her own. He has paid off his own mortgage and has a stellar credit rating.

Theoretically, Lucy’s father could borrow up to four times his salary, under many guarantor mortgage agreements (£200,000), provided he could show the lender that he can cover his own outgoings as well as Lucy’s mortgage. He is also willing to put a percentage of his home’s value as security against Lucy’s mortgage. Thanks to her father’s help, Lucy can secure a mortgage offer she’s happy with.

Can Guarantors help with Raising a Deposit?

Some providers offer guarantor mortgages products where the guarantor puts some of their own savings towards the loan. This, in turn, boosts the deposit, giving the borrower access to cheaper rates. In some cases, the guarantor won’t actually have to ‘gift’ the money to the borrower, they may instead retain it in their savings. This is known as a ‘Family Mortgage.’

Do All Guarantor Mortgage Types Require a Deposit?

No, 100% LTV mortgages, for example, are a very rare option for those who have no deposit but are still looking to get a mortgage. These agreements require a guarantor for the mortgage, who will then have to put up either a percentage of their property’s value as security against the loan or an agreed amount in savings.

If the guarantor’s property makes up the security for the loan and the homeowner has no mortgage, then a percentage of its value (for example, 25%) can be sought by the lender as a legal charge, should the borrower fail to keep up with repayments.

Alternatively, if savings are permitted to be used as security for a guarantor mortgage, then the guarantor’s savings will need to be put into a lender-approved savings account. It is then held there for an agreed amount of time, or until the borrower’s mortgage period ends. In some cases, these savings may pay interest, however, in other instances, the interest earned may be used to offset the interest on the borrower’s mortgage. Should the borrower fall into a crisis and the home gets repossessed, these savings will then be used to make up for any shortfall from the sale of the property.

How Do I Apply for a Guarantor Mortgage?

Mortgage providers will vary in terms of eligibility criteria in agreeing guarantor mortgage loans. The age of the guarantor considered for these types of agreements may vary, as well as the types of assets used as collateral.

It is also worth noting that the guarantor may not appear on the deeds of the property as a listed owner, they are simply making themselves liable for the mortgage loan. If you would like to read more on the process of applying for your first mortgage, take a look at our guide.

How is a Guarantor Mortgage Repaid?

Repayment terms for guarantor mortgages are typically the same length as your standard mortgage. Take a look at our Guide to Mortgage Types here.

When a guarantor signs the agreement, they commit to making the loan repayments or settling the mortgage, should the borrower be unable to keep up with the payment schedule.

Please note: If there are difficulties during the mortgage term, under some agreements, the guarantor may have to pay extra lender charges, to get the borrower back on their mortgage repayment schedule. Further, your home may still be at risk of repossession, should the borrower and guarantor fail to meet the repayment terms of the mortgage agreement.

Can I Exit as The Guarantor?

Depending on the guarantor mortgage you opt for; it is possible for the guarantor to exit the agreement, in order for the borrower to take on the full responsibility of the mortgage themselves.

In some cases, however, lenders may not permit the guarantor to leave the mortgage contract until the loan to value ratio has reached a certain percentage (such as 80%). It is also worth checking if your guarantor mortgage is portable, or as a borrower, you may be forced to stay-put once your mortgage agreement has been signed-off.

Q: What are the Pitfalls of Guarantor Mortgages?

A: Besides the drawbacks already mentioned i.e.;

• Risk to the guarantor’s own property or savings
• Forgoing interest on the guarantor’s savings (if it is used as security)
• Extra charges brought about by the lender in times where the borrower is facing difficulties staying on their repayment schedule

There are still a few more drawbacks to taking out a guarantor mortgage. These include;

• Higher Costs - As there are very few 100% LTV mortgage products available on the market, their fees and charges may not be as competitively priced as other mortgage alternatives. The interest rates on this type of mortgage may also be higher.
• Risk of negative equity-  You may find yourself paying a mortgage that is higher than the value of the property.
• Extra Lender Precautions-  When taking out a 100% LTV mortgage, (and other LTV mortgage types) borrowers may have to fork-out for a mortgage indemnity guarantee, protecting the lender against potential losses.

Are there any alternative types of mortgage on offer?

There are several alternatives to taking out a guarantor mortgage. For example, if you are a first-time buyer, or home mover, and need help securing a property you could look at;

Taking out a Loan - Some lenders will even permit the borrower to take out a loan to boost their deposit funds, before applying for a mortgage. Of course, the borrower will need a good credit rating in order to apply for this.

Help to Buy Scheme- Help to Buy is a government scheme which offers a number of different options to first time buyers and homeowners alike.

Family Offset Mortgages -Offset mortgages allow guarantors to offset their savings against their relative’s mortgage. The guarantor retains their savings whilst helping their family member through the first few years of property ownership.

Flexible Family Mortgage -With a 5% deposit for a house, flexible family mortgages allow relatives three options;

1. Put 20% or more into a savings account, the interest earned is used as security for the mortgage. In this case, the LTV may still be around 95%, but the security is given by the family. This should give borrowers access to a lower interest rate.
2. A guarantor can use some of the value of their own property as security for their family member’s mortgage.
3. A combination of 1 and 2 as well as the Offset Mortgage option.

Family Deposit Mortgage - Family members can open a special savings account for their relative’s first deposit on a home. The money will be held for a certain amount of time and used as security against the mortgage. If the borrower defaults, then the money is at risk. However, if the borrower stays on-schedule the family member retains the savings, plus any interest earned.

…And Finally

Guarantor mortgages are a long-term financial commitment for both parties, so please bear this in mind before applying. Ensure the guarantor and the borrower are both fully aware of the financial ramifications of breaching the terms of the guarantor mortgage agreement. It’s also worth noting that relationships are also at risk with a financial undertaking such as this.  It is, therefore, vital to seek advice from an independent mortgage advisor who can explain the agreement in detail and ensure that the borrower and the guarantor get the fairest deal around. So, what are you waiting for? Get in touch with an advisor for free advice and quote now.