One solution for first-time buyers eager to overcome the hurdle of affordability is the guarantor mortgage which allows family or friends to support their application. But it’s not without its risks. Darren Polson explains more…
It’s no secret that it is becoming increasingly difficult to get onto to housing ladder with prices rising and a shortage of affordable properties across the country.
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.
What are the solutions for first-time buyers with low deposits?
In some cases, particularly in recent times, we have seen a rise in gifted deposits which help first-time buyers to secure enough in savings 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.
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 or cannot pay.
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 be a guarantor on a mortgage?
Guarantors tend to be people in a more stable financial situation, so 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 you 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 this type of mortgage to work, the guarantor usually needs to be in a stable financial situation.
What are the criteria for being a guarantor on a mortgage?
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 a guarantor mortgage?
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 the guarantor could find themselves on the hook for mortgage payments when they least expected it. In addition, they could damage their credit score if the borrower fails to make payments and the guarantor then struggles to keep up.
There is always the possibility of risk to the guarantor’s own property – in a worst-case scenario a lender might repossess their home if there’s no other way to get their money back
Last but not least, money is always a sensitive subject and the guarantor could risk their 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
