Guarantor Mortgages Explained
Written by Zenyx Griffiths
20th Feb 2020 (Last updated on 16th Mar 2020) 8 minute read
A guarantor mortgage is when a family member becomes a guarantor and agrees to cover your mortgage payments if you’re unable to. It can help you secure a mortgage if you’re struggling to save for a deposit or have financial circumstances that may dissuade mortgage lenders.
Parents and family members often offer to help out when someone is struggling to get onto the property ladder. One way to do so is to become a guarantor for a mortgage. However, there are risks to consider when agreeing to this type of mortgage and so it’s a decision not to be taken lightly.
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.
What is a Guarantor Mortgage?
A guarantor mortgage is when a parent or family member agrees to act as your guarantor, legally agreeing to cover your mortgage repayments if you’re unable to. If you’re looking to secure a mortgage but are unable to acquire the deposit or have financial issues that could dissuade a lender, then this is a possible mortgage option and mortgage type for you when looking to purchase a property.
This is also known as a ‘family assisted mortgage’ as it 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.
Research by the Council of Mortgage Lenders 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 house 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.
A guarantor mortgage will not be suitable for everyone and some lenders may only accept applicants over 21. To help you decide if this type of mortgage is the best choice for you, we’ve included the situations where a guarantor mortgage would be most suitable:
- If you’re a borrower (or first-time buyer) with no deposit or a small deposit
- If you have a low income
- If you have a low or non-existent credit-score
- If you have little or no credit history
- If you want to buy a home that costs more than the lenders think you can afford
For further information, it would be wise to speak to an independent mortgage broker for advice.
Who Can be a Mortgage Guarantor?
Before applying for a guarantor mortgage, it’s important to note that many lenders will require the guarantor to be a close family member, such as a parent or grandparent. To qualify, a guarantor will usually need the following:
- Savings or a property: their savings could potentially be held by the lender in a locked account or the lender could take charge over a portion of their property.
- A Strong Credit Score: this ensures that they’re financially reliable.
- A High Income: this will prove that they can cover the costs if the borrower can not.
- Received Legal Advice: this could be a requirement for some lenders to ensure the guarantor is aware of the potential risks involved.
Before agreeing to be a guarantor, it’s important to factor in the possible risks before making a final decision. Even if you qualify and can become a guarantor for a family member, there are still risks and the possibility that you will have to cover their costs.
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 Link Mortgages
This is offered by the Post Office and is a viable option if you don’t have a deposit ready and your guarantor owns their own property outright. This type of guarantor mortgage means you’ll take out a 90% mortgage on the property you’re purchasing with the remaining 10% as a loan secured against your guarantor’s home.
The 10% loan must usually be repaid in the first 5 years, with both you and your guarantor being responsible for it. However, if you miss any of the repayments, your guarantor will only be responsible for the 10% you borrowed against their home.
Before making a decision, it’s important to speak to a mortgage broker for further information as the rates are not as competitive as those of traditional repayment mortgages. This means that it could end up costing you more in the long run.
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 your loan is reduced to £180,000. A number of lenders offer this type of mortgage, with one example being the Family Building Society.
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 a certain amount of money into a savings account. This amount is usually somewhere between 10-20% of the property price, depending on the lender you’re with. 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.
Unlike a family offset mortgage, your guarantor can still earn interest on the money within the account. However, it’s important to note that the interest rate will likely be lower than with other 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.
There are a variety of mortgage lenders who offer this type of deal, all with their own requirements and conditions. Barclays offers a Family Springboard Mortgage as one option, or there’s Lloyds’ Lend a Hand mortgage. Don’t forget to speak to an independent and unbiased mortgage broker before choosing the right path for you.
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, it is your guarantor who must 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
- They charge you a fee
- They ask your guarantor to make the repayments on your behalf
If you continue to miss your repayments, there could be more severe consequences for you and your guarantor. This could include:
- 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, then the lender may allow the borrower to change the terms of their mortgage providing you with an option to withdraw. Other situations where you can stop being a mortgage guarantor includes:
- The lender is going out of business.
- If the loan is closed or paid off.
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