Getting on the property ladder has become increasingly difficult in recent years, particularly as we face a cost of living crisis that has resulted in a tight squeeze on most people’s pockets.
Property prices have also increased dramatically, with the average house price rising to £296,000(£36,000 higher than the previous year). So, it’s little wonder so many people are struggling to purchase a property.
However, for those trying to buy a new home, there are ways in which the process can be made easier. Guarantor mortgages are an excellent option for those who have been refused a mortgage due to factors such as a low credit score or income.
In this article, we’ll give you all the information you need to know about this type of mortgage. Here, we’ll cover what a guarantor mortgage is and who may benefit from one. We’ll also explore the different types of guarantor mortgages, the pros and cons, who can be a guarantor, and frequently asked questions about guarantor mortgages so you can decide whether it’s the best option for purchasing a property. So, let’s get stuck in!
What are guarantor mortgages?
A guarantor mortgage is where someone (usually a close family member) takes on some of the risk of the mortgage and acts as a guarantor. This means that if the borrower can’t repay their mortgage, the guarantor is then legally responsible for the repayments.
Guarantor mortgages work by using the guarantor’s property or savings as security. However, despite this, the guarantor does not own a share of the purchased property, and they won’t be named on the title deeds. This type of mortgage is advantageous for many reasons, especially for those who are struggling to get on the property ladder alone. This said, it is not without risk — we’ll discuss the pros and cons of guarantor mortgages later in the article.
Who are guarantor mortgages suitable for?
Guarantor mortgages are suitable for those struggling to secure a mortgage to get onto the property ladder. This could be due to the following:
- Bad credit score: a low credit score means you are considered to be of higher risk to loan money to. Therefore, you may find it harder to be accepted for a mortgage.
- Sparse credit history: having little to no credit history can also make mortgage brokers wary of loaning you money as you have no proof that you can pay it back.
- Low income: income is a key factor that mortgage brokers use to determine how much money you can borrow. If you have a low income, you may find you can borrow more if you have a guarantor.
- Low deposit: guarantor mortgages can be an excellent option if you have a small or no deposit, as they allow you to borrow up to 100% of the property’s value. While 100% mortgages aren’t available for everyone, you won’t need a deposit to purchase a property if you qualify.
Who can guarantee a mortgage?
A mortgage guarantor cannot be just anyone. Your lender needs to be confident that your guarantor will support you for the long term and make your mortgage repayments if you cannot do so. For this reason, your mortgage guarantor needs to have sufficient funds to be able to do this. For example, if they are paying their own mortgage, they will need to have a high enough income to cover both their repayments and yours.
Furthermore, mortgage providers will also ask that the guarantor for your mortgage is someone you have a close long-term relationship with — some may even require your guarantor to be a family member, such as a parent. They need to be over the age of 21, and some lenders also have upper age limits.
In addition to these factors, your guarantor will usually need:
- Savings or property: depending on the type of guarantor mortgage you are applying for, your guarantor will either need to have savings or property to use as security for your mortgage. If your mortgage requires savings, your guarantor will usually need to put the money in a special savings account which will be locked for several years or until you have repaid enough of your mortgage. Alternatively, for a guarantor mortgage that uses property as security, your mortgage lender will take legal charge over a portion of your guarantor’s property. Your lender may also require your guarantor to have paid off their mortgage in full, or at the very least, have a certain amount of equity in the property, e.g. they’ve paid off 50% of the mortgage.
- A good credit history: your guarantor needs a good credit score and history, which will prove to the mortgage lender that they can manage their finances well and are low risk.
- Legal advice: some lenders require guarantors to receive legal advice so that they are fully aware of the risks. But, even if your mortgage lender does not make it a requirement, taking independent legal advice is still always recommended.
Guarantor mortgage risks
The main risk of a guarantor mortgage is that the guarantor is legally responsible for mortgage repayments if the borrower defaults on them, which can be at the cost of their savings or property. On top of this, if the guarantor cannot make the repayments, they risk damaging their own credit score. It is also worth being aware that your guarantor may be refused a mortgage in the future if they are still providing collateral for yours. Therefore, you should check to see whether they plan to take out their own mortgage down the line before they become legally involved in yours.
Types of guarantor mortgages
There are two main types of guarantor mortgages:
- Property as security
- Savings as security
We’ll run through each one of these in this section. We’ll also explore another type of mortgage for borrowers with low incomes or deposits: family offset mortgages.
Property as security
Using property as security allows a guarantor to help a friend or relative get on the property ladder without needing savings. For this reason, this type of mortgage is a useful option. However, using property as security can come with huge risks.
With this type of mortgage, a legal charge is placed against the guarantor’s property. This will require the guarantor to own a high proportion of the property — although some lenders require the guarantor to own the whole property outright.
If the borrower defaults on the mortgage repayments and the mortgage broker repossesses the property, but cannot recover the full amount owed when it is sold, the guarantor’s property can also be repossessed to cover the remaining amount.
Savings as security
Using savings as security is another way for a guarantor to help someone purchase a property. In this case, the guarantor will usually need to put around 5-20% of the property’s value into a savings account which will then be linked to the borrower’s mortgage. This money will be held in the account for either a specified period of time or until the owed amount falls below a certain threshold.
If the borrower defaults on repayments, the mortgage lender may keep the savings account locked for longer. However, the bigger risk is that the borrower’s property may be repossessed and sold to cover the remaining mortgage balance. If this does not recuperate the full amount, the lender can take the difference out of the guarantor’s savings.
Family offset mortgage
A family offset mortgage works by a family member putting savings in an account (usually in place of a deposit) to offset against the mortgage. The account is linked to the mortgage, and the mortgage broker deducts the amount of savings from the total capital being borrowed. This means that the borrower will only have to pay interest on the reduced amount.
Once the borrower has repaid a chunk of the mortgage (around 30%), the savings will be returned to the guarantor. There is usually a set period of time in which this needs to be paid — generally 5 years.
Where can I find a guarantor mortgage?
There are several ways to find a guarantor mortgage:
- Go direct to a lender: Many high-street banks, such as Barclays, Lloyds, and Nationwide, offer this type of mortgage. You can approach them directly for more information on the mortgages they offer.
- Ask a mortgage adviser: if you’re unsure what kind of mortgage is best for you, you can speak to a mortgage adviser. They can assess your current financial situation and advise you on the most appropriate option.
- Use a mortgage broker: a mortgage broker can provide you with expert advice and up-to-date information on the mortgages on the market so you can make an informed decision that is right for you.
- Online comparison sites: if you want an overview of the market, you can use comparison sites to find mortgages for you. By inputting your requirements, you can also tailor your search to fit your requirements.
Finding the right mortgage can be a lengthy process, but it’s worth taking the time to make sure you get the best one for your circumstances. It’s also worth noting that you don’t have to make a decision on a mortgage offer straight away. Usually, mortgage offers last for three to six months, but check with your lender if you’re unsure.
Can I borrow more with a guarantor mortgage?
Yes, you can often borrow more money with a guarantor mortgage than a standard one, even if you have little to no deposit. This is because your guarantor will use their property or savings as security for the mortgage. In the eyes of the mortgage company, this is deemed less risky; therefore, you may be offered a bigger mortgage.
It is worth remembering, however, that mortgage lenders will typically only loan you up to four times your annual salary. You’ll also still need to pass their affordability checks to determine how much you can borrow.
What happens if I can’t pay my mortgage?
If you can’t pay your mortgage, there are several things that may happen. Firstly, your lender may give you some more time to make repayments and set up a repayment plan to help you get back on track with your finances. However, there may still be fees due to late or missed payments. Alternatively, you can ask your guarantor to make the payments for you.
If you still cannot pay your mortgage, your lender may:
- Contact your guarantor — if they haven’t already been approached.
- Use your guarantor’s savings from the designated account — if they used savings as security.
- Extend the time your guarantor can’t access their savings for.
- Repossess your property to cover the amount you owe. If this does not cover it, your lender can repossess your guarantor’s property or use their savings that were held as security for your mortgage.
However, there are some things you can do to help ensure you don’t end up in the position of having your home repossessed, including taking out mortgage insurance. This is a specialist insurance policy which protects your mortgage repayments in the event you cannot work due to illness or if you are made redundant.
Guarantor mortgage pros and cons
There are several benefits to taking out a guarantor mortgage, including:
- Getting on the property ladder without savings: with some guarantor mortgages, you can get a loan without needing any savings. Alternatively, you may be able to get a low-deposit mortgage, meaning you need to save far less money than you would with a standard mortgage.
- You may be able to borrow more: with the added security of a guarantor, lenders may offer you a bigger mortgage.
- Higher chance of being accepted for a mortgage: having a guarantor can increase your chances of being accepted for a mortgage as lenders see it as less risky.
- Potentially boost your credit rating: if you have a low credit score, making regular and on-time repayments towards your guarantor mortgage can help increase your credit score.
However, there are also some potential risks and disadvantages that you should be aware of, including:
- Higher interest rates: guarantor mortgages often have higher interest rates than standard mortgages as they are higher risk in the eyes of mortgage brokers.
- Can cost your guarantor’s savings or property: if you default on your mortgage repayments, your guarantor will be responsible for covering them. In some cases, this may cost them their savings or property. Their credit score may also be damaged in the process.
- Ending up in negative equity: you may end up in negative equity if the value of your property drops below the amount you have borrowed. In this case, you would still need to repay the full amount of money borrowed and any interest accrued.
- Higher monthly repayments: generally, the smaller your deposit, the higher amount you will have to pay back to your mortgage broker each month.
- No immediate stake in your property: if you take out a zero-deposit mortgage with a guarantor, you have no immediate stake in the property. This means that if its value decreases, you may be forced to sell, but you’ll still need to pay back your mortgage broker in full, along with any other costs incurred.
FAQs
In this section, we’ll run through some of the other frequently asked questions about guarantor mortgages.
How much can I borrow with a guarantor mortgage?
Usually, you’ll be able to borrow four times your annual salary. Some lenders will allow you to borrow up to five times your salary with a guarantor. However, you’ll still be subject to the lender’s affordability checks to determine how much you can borrow. These checks look at your overall salary and identify how much you can afford to repay each month.
Are you more likely to get a mortgage with a guarantor?
Yes, having a guarantor means you are more likely to be accepted for a mortgage. The reason is that mortgage lenders will see the loan as less risky because there is a fallback if you cannot pay your monthly repayments.
What happens if my guarantor dies?
Although it’s not something you want to plan for, you’ll need to know what happens if your guarantor dies while your mortgage is still in place. If you are unfortunate enough to end up in this position, there are a few things that can happen:
- Your mortgage lender may require you to find another guarantor.
- If you’ve paid off a large enough chunk of your mortgage, you may be able to remortgage your home without a guarantor.
- If you’re a beneficiary in the will of your guarantor, you may be able to use the inheritance to pay off some or all of your mortgage.
Can I get a guarantor mortgage for a buy-to-let property?
Although extremely rare, some lenders do offer guarantor mortgages for buy-to-let properties. For this type of mortgage, repayments are generally lower as you’ll only be paying off the interest for the loan. Additionally, they are lower risk as the mortgage repayments are usually covered by the rent received from tenants — this means you’re more likely to be able to afford the mortgage if you find yourself without income.
Are guarantor mortgages cheaper?
The upfront cost of a guarantor mortgage may be cheaper than a standard mortgage due to a smaller deposit being required. However, guarantor mortgages have higher monthly repayments as a result of this. Additionally, they are also subject to higher interest rates due to the increased risk for lenders.
Also read:
What insurance do you need for a mortgage?
Exchange of contracts explained
Leasehold vs freehold: What are the differences?