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Guarantor Mortgages Explained

Written by Reviewed by Emma Lunn

20th Feb 2020 (Last updated on 25th Nov 2020) 11 minute read

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.

This article will cover the following:
  1. Covid-19 Mortgage Update
  2. How Does a Guarantor Mortgage Work?
  3. Who is a Guarantor Mortgage Suitable For?
  4. Who Can be a Guarantor on a Mortgage?
  5. How Do I Get a Guarantor Mortgage?
  6. What are the Different Types of Guarantor Mortgages?
  7. Guarantor Mortgages and First-Time Buyers
  8. What Happens if You Miss a Payment?
  9. Can You Stop Being a Guarantor?
  10. Tips for Entering a Guarantor Mortgage
  11. Saving Money With Compare My Move

Covid-19 Mortgage Update

Due to the global spread of Covid-19 and the lockdown that followed throughout 2020, the UK is officially in recession. This has resulted in the housing market taking an unexpected and severe hit, impacting the industry as well as many British buyers and sellers. 

As a result of this, the government announced temporary reforms for homeowners, one of which is the ability to apply for a 3-month mortgage payment holiday. It also means that a variety of lenders may have changed or reduced their mortgage products. It’s advised that you speak with your current mortgage provider or broker, to help you understand what is available to you and what would best suit your current circumstances.

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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. 

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. 

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

You should take legal advice before agreeing to guarantee a mortgage. Some lenders even insist on this.

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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. 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 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.  

Whilst Halifax, Loughborough, Marsden, Lloyds and Saffron all suspended their deals after the coronavirus outbreak in 2020, Barclays, Mansfield, Family Building Society and Tipton have deals still open to applicants.

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. 

Buckinghamshire, Family Building Society, Mansfield, Nationwide and Tipton offer this type of mortgage deal as of August 2020. 

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 Shared Ownership, 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

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, 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.

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.

Saving Money With Compare My Move

Saving for a deposit can be difficult enough, but with our free service, you can ensure you continue to save even after you’ve secured the house of your dreams. If you’re currently saving for your next house move, then don’t forget to compare conveyancing, surveying and removal quotes with us by completing our quick and easy form to save money when you need it most. 

Zenyx Griffiths

Before Compare My Move, Zenyx once wrote lifestyle and entertainment articles for the online magazine, Society19 as well as news articles for Ffotogallery.

Emma Lunn

Reviewed by Emma Lunn

Freelance Personal Finance Journalist,

Emma Lunn is an award-winning journalist who specialises in personal finance, consumer issues and property.