A guarantor mortgage is when a family member agrees to act as a "guarantor" when applying for a mortgage. This means they agree to pay your mortgage payments if you’re unable to and can be legally pursued for the debt.
Some mortgage lenders ask for a guarantor if:
- You only have a small deposit
- They are not completely confident you can pay your mortgage
To help you better understand what a guarantor mortgage is and how it works, Compare My Move has worked with professional property finance journalists to create this guide and explain the requirements of a guarantor mortgage.
How Does a Guarantor Mortgage Work?
A guarantor mortgage allows parents or grandparents to help their children get onto the property ladder. It can sometimes increase your likelihood of getting a mortgage or allow you to borrow more, especially if your financial circumstances are not ideal. When someone acts as a guarantor, they commit to covering the mortgage repayments if you should fail to do so.
Guarantor mortgages are also sometimes referred to as a ‘family-assisted mortgage’ as it’s typically family members who act as guarantors. Research by the Council of Mortgage Lenders (now known as UK Finance) discovered that, in 2014, over half of 300,000 first-time buyers who bought a home were likely to have had help from “the bank of mum and dad”. The number of new homeowners requiring help from families or government schemes is not decreasing, meaning guarantor mortgages still remain a viable option.
It’s important to note that the guarantor will not own a share of the property or be named on the deeds. They will only be liable for covering the mortgage repayments if the buyer is unable to.
Who is a Guarantor Mortgage Suitable For?
The number of people using mortgages to buy homes is quickly increasing, with research from UK Finance stating that the number of completed mortgages for homebuyers increased in October 2019 from 2.8% to 4.2%. However, not everyone can afford one or will be accepted. A guarantor mortgage is an option for those who will likely struggle to save for a mortgage deposit or struggle to get a mortgage application accepted. It is often used as a solution once someone has had their previous mortgage application denied.
A guarantor mortgage will not be suitable for everyone and some lenders may only accept applicants over 21. We’ve included the situations where a guarantor mortgage would be generally suitable:
If you’re a borrower with no deposit or a small deposit
If you’re a first-time buyer
If you have a low income
If you have a poor or non-existent credit-score
If you want to buy a home that costs more than the lenders think you can afford
If you have little or no credit history
Who Can be a Guarantor on a Mortgage?
Most lenders require a guarantor to be a close family member, such as a parent or grandparent. There are strict criteria as it's a high risk for a mortgage lender. Your guarantor's savings could potentially be held by the lender in a locked account or the lender could take charge over a portion of their property. You should take legal advice before agreeing to guarantee a mortgage. Some lenders even insist on this.
To qualify, a guarantor will usually need the following:
To be a homeowner
To have a certain amount of equity in their property
To have a good credit score
To have a decent amount of disposable income
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How Do I Get a Guarantor Mortgage?
There are a number of mortgage lenders who offer guarantor mortgages, some of which are high-street banks. It would be wise to discuss your options with a financial adviser or mortgage broker before you decide to continue. The mortgage offer you receive will highly depend on your personal circumstances and those of your chosen guarantor.
If you’ve found a lender you’d like to work with, you can apply for a guarantor mortgage either online or through a face-to-face appointment. You will need to take a variety of documents and details with you, such as the financial details of you and your guarantor.
You can also apply through an independent mortgage broker if required. They will have experience in dealing with a number of lenders and can advise you on which offers would be best suited to your individual needs.
What are the Different Types of Guarantor Mortgages?
There is an increasing number of guarantor mortgages available, each with their own requirements and descriptions. In this section, we’ll take you through a few of the options available and how they differ from each other.
Family Offset Mortgages
A family offset mortgage is when a family member puts their savings into an account linked to your mortgage. The value of their savings is then deducted from the amount of mortgage that you pay interest on, potentially saving you money.
An example of this would be if your mortgage is £200,000 and your guarantor deposited £20,000 into the savings account, then you'd only pay interest on £180,000.
However, there are issues to consider, as with any guarantor mortgage. These include:
- Your family member won’t earn interest on their savings whilst they’re held in the offset account.
- Your guarantor may not be able to access their savings for a pre-agreed number of years or until the outstanding loan reaches a set amount.
- The lender may hold onto the savings for longer if you miss any mortgage repayments.
- If the worst happens and your home is repossessed by the lender and sold, your family member’s savings could be used to recoup the difference if required.
Savings as Security
This option means a family member becomes a guarantor by depositing 10 to 20% of the property price into a savings account. The money will then be held as security for your mortgage for a set number of years or until the amount you owe falls below a certain percentage of the property's value.
The guarantor can still earn interest on the money within the account – but the interest rate might be lower than alternative savings accounts.
Again, there are risks to consider before you decide to apply. For example, if you miss any repayments, the lender may hold onto the guarantor’s savings for longer. Also, if your property is repossessed and sold by the lender, they could make up the difference of what you owe by using the guarantor’s savings.
Whole Loan or Shortfall Guarantors
Whatever type of guarantor mortgage you choose, it’s important for a guarantor to understand whether they are guaranteeing the whole loan or the shortfall.
“Whole loan” guarantors agree to cover the total mortgage amount. So if you borrow £100,000 as a mortgage, the guarantor would agree to cover that amount if you failed to pay your mortgage.
“Shortfall” guarantors only agree to cover a proportion of the mortgage. So if you needed to borrow £100,000 but the lender thought you could only afford £80,000, your guarantor would agree to cover £20,000. This type of guarantor mortgage is less common than a whole loan guarantor.
Property as Security
This is when your family member puts up their own property as security for the loan. In the worst-case scenario, if you didn’t pay your mortgage, the lender could repossess the family member’s home. To do this, the guarantor must own a significant proportion of their property outright.
Guarantor Mortgages and First-Time Buyers
There are a number of lenders who will offer guarantor mortgages for first-time buyers. In fact, you may find that there are some lenders who have made it a requirement for their guarantor mortgage deals.
If you’re a first-time buyer with a bad credit score, some lenders may still provide you with an offer. As long as your guarantor passes their eligibility and affordability checks, some lenders may overlook bad credit scores for first-time buyers, unless it’s severe.
However, it’s important to note that you likely won’t be able to have a guarantor on a Help to Buy mortgage. There are a variety of government schemes that can help first-time buyers, such as Help to Buy, Right to Buy and the Shared Ownership scheme, all of which can’t be used with a guarantor mortgage for the majority of lenders. It would be wise to speak to a mortgage broker beforehand to help you find the right deal for you and your personal circumstances.
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What Happens if You Miss a Payment?
If you never miss a repayment, your guarantor will not be required to do anything. However, if you do miss any repayments, the lender can ask your guarantor to cover the costs.
These are the first few possibilities that may occur if you miss a mortgage repayment:
Your lender provides you with more time to repay what you owe
You’re charged a fee
Your mortgage lender asks your guarantor to make the repayments on your behalf
An extension of the period of time your guarantor cannot withdraw from the savings account associated with the mortgage
Money from your guarantor’s savings account being removed
Your house being repossessed
If money is still owed after the repossession, then the guarantor’s house could also be repossessed
It’s important to work out how much you can afford before applying for a mortgage regardless. But this is especially true for a guarantor mortgage as your failed repayments will then be passed onto your family member.
In 2014, the Financial Conduct Authority introduced a cap of 4.5 times your income on the loan-to-income ratio for mortgage lenders, ensuring people can only borrow what they can afford. However, it’s still important for you to evaluate your own financial circumstances and to talk in-depth with your guarantor before committing to the agreement.
Can You Stop Being a Guarantor?
If you’ve signed the contract then you are legally required to complete the agreement and continue as a mortgage guarantor. Once contracts have been signed, you can not stop being a guarantor and the borrower can not switch guarantors.
However, if the borrower’s financial situation improves or they pay off a certain amount of the mortgage, the lender may agree to release the guarantor. If you remortgage, and your new lender is happy you can afford the mortgage, you might not need a guarantor on your new mortgage. Don't forget, you'll need to hire a remortgage conveyancer to help with the process.
Tips for Entering a Guarantor Mortgage
If you’re still considering applying for a guarantor mortgage, then we’ve provided a list of quick tips to help you prepare:
Speak to your guarantor first
Don’t forget to discuss the situation with your guarantor and to ensure they understand the mortgage offer completely before agreeing. It’s also important to highlight that they will not be owning a share of the home.
Use an experienced conveyancer
Compare conveyancing quotes to ensure you work with a highly-trained and qualified conveyancer who, ideally, has experience handling guarantor mortgages.
Be open and honest
As with any mortgage deal, it’s important to be honest about your financial situations with your lender. However, in these circumstances, it’s also important to be honest with your guarantor too as they will be responsible should you fail to make a repayment.
Learn More About Mortgages and Deposits
This article is part of our mortgages and deposits guide. Next in our guide we take a look at 95% mortgages. To find out more read What Are 95% Mortgages?
