The last few months have seen a drop off in house sales and we don’t have to look too far to see the reasons for this.
One of the key reasons was the rise in mortgage rates following the UK government’s fairly disastrous mini-budget.
Whilst it’s fair to say that those rates have fallen in recent times they remain at levels we haven’t seen for many years.
Together with the ongoing cost-of-living crisis it’s no surprise that many people have less confidence about either moving or buying a home for the first time.
One of the biggest and most common challenges aside from earning a sufficient salary is finding a deposit.
The days of 100% mortgages pretty much disappeared some years ago and typically lenders will be looking for a deposit of at least 5% or 10% of the purchase price. For a property costing £150,000 that means a deposit of at least £15,000 – a great deal of money by any measure.
It’s also important to mention that the minimum deposit required by a lender does not cover anything above the valuation of the property – which can of course mean an even bigger deposit.
So, what are the alternatives for first-time buyers with little or no deposit?
Well, in some cases, particularly in recent times, we have seen a rise in gifted deposits which helps first-time buyers to secure enough of a deposit to realistically try and buy their first home. Some mortgage-free parents for example can release funds from their own property or gift savings.
Another option is to consider is a guarantor mortgage – it’s something which lenders have offered for many years but for very obvious reasons it is becoming more popular.
So, what is a guarantor mortgage?
Simply, a guarantor mortgage is a mortgage where another person agrees to take on responsibility for your repayments in the event you can’t pay.
The person or people in question are known as the guarantor – unsurprisingly it’s usually a family member or close friend of the applicant.
The guarantor won’t own a share of the property, and they won’t be named on the deeds. But they must legally agree to be liable for the mortgage repayments if the borrower falls behind in repayments.
Guarantor mortgages are definitely a popular and fairly straightforward choice for people who want to help their children get a foot on the property ladder.
Who can act as a guarantor on a mortgage?
Guarantors tend to be people in a more stable financial situation – hence why lenders are more likely to agree to a mortgage if there’s a guarantor. Typically this means a guarantor mortgage is easier to get if they have a low credit score.
Anyone can be a mortgage guarantor – a parent or grandparent, another family member, or even a close friend.
A guarantor can be in work, self-employed, or retired. But for a guarantor mortgage to work, the guarantor usually needs to be in a stable financial situation.
What are lenders looking for when assessing guarantor mortgage applications?
Most lenders are used to looking at these applications and will carefully assess anyone before they’re approved as a guarantor. Here’s what they’re looking for:
- Someone at least 21 years old
- Someone who either owns their property outright or has a high level of equity in their property
- A high enough income to cover the cost of mortgage repayments if necessary
- A strong credit score
Many lenders also have maximum age requirements, since mortgages will typically last around 25 years. Usually, it’s very difficult to get a guarantor mortgage if your guarantor is over 75 years old.
Lenders also want to make sure that the guarantor fully understands the risks involved, so they might want to see some proof your guarantor has taken specialist legal advice from a solicitor before they’ll be approved.
What are the risks of guarantor mortgages?
Guarantor mortgages are designed to help people buy property when they’re in a less secure financial situation – but of course they work by spreading a lot of that risk to the guarantor.
Firstly, and possibly most obviously, in certain circumstances you could find yourself on the hook for mortgage payments when you least expected it. In addition, you could damage your credit score if the borrower fails to make payments and you then also struggle to keep up.
There is always the possibility of risk to your own property – in a worst-case scenario a lender might repossess the guarantor’s home if there’s no other way to get their money back.
Last, but not least, money is always a sensitive subject and you could risk to your relationship with the borrower – there’s also the emotional side to consider.
A guarantor mortgage creates a financial relationship between family members, and if the worst happens it could put a serious strain on your family.
In summary, guarantor mortgages can be an extremely useful option but it should never be a decision taken lightly, or without taking the appropriate independent professional mortgage advice.
Darren Polson is head of mortgage operations at Aberdein Considine
