Can a guarantor mortgage guarantee you a home?

This month Vanya Damyanova takes a closer look at guarantor mortgages, a niche product which just might be the little nudge you need to get on the property ladder

Affordability is an issue in the mortgage market with new regulation such as the Mortgage Market Review (MMR) forcing lenders to tighten up requirements for borrowers.

The first year of the new MMR rules, introduced in April 2014, has shown that if providers want to cater for all types of clients, new and more flexible products are needed. Guarantor mortgages are one way for people with more modest means to get the chance to take out a loan to buy a new home.

If you are wondering whether a guarantor mortgage is something that could help you, see what the experts are saying. We spoke with the Building Societies Association (BSA), consumer protection organisation Which? and estate agencies Connells and Kinleigh Folkard & Hayward (KFH) which all provided comment and advice about guarantor mortgages.

What are guarantor mortgages?

Guarantor mortgages are so-called, as guarantors (typically a parent or relation) use their money or asset (e.g. their own property) as the security/deposit or collateral with the lender. Some lenders have specific guarantor mortgage products, for others this is just an available feature on certain products.

Guarantor mortgages are intended to allow those on lower incomes to buy property as somebody else is providing a guarantee of mortgage repayment should the borrower default.

Generally speaking the main benefit of a guarantor mortgage is to enhance the borrowing potential for the applicant until they have the ability to cover the payments solely after they have finished study/training for a professional role. The deposit level is not really affected by this process so having less savings would not make this an additional option.

Who are guarantor mortgages best suited for?

Typically these products are of interest to younger first-time buyers who may not have sufficient funds in their own right for a deposit but have the potential to increase earnings quickly, for example, trainee professionals such as doctors, solicitors etc.

Depending on circumstances this type of product could be a way of securing a mortgage if you’ve had applications to borrow in your own name rejected, perhaps due to a low credit score or a lack of credit history.

These products are normally assessed on the income of the guarantor only and so may be suitable in particular for students who would be able to afford the mortgage after studying, for example.

What will the lender need to know to approve a guarantor mortgage?

Lenders will differ in the kinds of factors they assess and these can include: current and future earning capacity, current and future expenditure, credit score, retirement age, age in general, the size of your deposit and banking conduct.

In the past lenders only assessed the borrower’s circumstances on this type of mortgage, but now the guarantor is also being assessed, so factors like age, can have a bearing on whether the lender will offer the mortgage – it’s not always enough to have the money or assets as the collateral.

For guarantor mortgages the lender may be happy for the guarantor’s age to run past retirement or for longer than would be allowed with a normal mortgage product.

If the mortgage holder can’t make the payments this will fall to the guarantor – if they can’t pay, they could lose the assets they put up as collateral or their home (if this is the collateral) may be repossessed.

David Blake at Which? Mortgage Advisers, comments: “While they might not be the preferred choice for most, guarantor mortgages can be an option for borrowers like first-time buyers who are struggling to get a mortgage in their own name. In the first instance it’s always a good idea to seek advice from an experienced broker, to help borrowers carefully consider all the risks and explore the best product for their needs. When looking for a mortgage adviser you should look for one that offers impartial, whole-of-the-market tailored advice based on a thorough assessment of individual circumstances.”

[box style=”0″]

Which? Mortgage Adviser’s top tips on guarantor mortgages

• Consider all the options: remember guarantor mortgages are just one of the options, a good mortgage adviser will offer tailored advice on what’s best for you, based on an assessment of your specific circumstances.
•  Seek independent legal advice: always a good idea but it’s vital that both guarantor and mortgage holder understand the risks and how the product works.
• Think ahead: guarantors should consider the protections they may want to put in place, for example, if they are acting as guarantors for their son/daughter what happens in the event of a break-up if they’re buying with their partner?
• Protect yourself: explore mortgage protection options so that mortgage payments are covered in the event of illness, injury or death.
• Families and mortgages don’t always mix: both guarantors and borrowers should do their research, shop around and consider all the risks carefully before signing up to this type of product.

[/box]

Do many lenders provide guarantor mortgages?

Guarantor mortgages are a niche product. Supply reflects demand and the requirement for guarantor mortgages is not high. However, the building society sector does provide a variety of niche mortgage products that fall under the guarantor category, according to the BSA.

Currently, the bulk of these products are offered by smaller building societies, according to Which?.

The Bath Building Society has an entire scheme for guarantor mortgages, the Parental Assistance Mortgage Scheme. Challenger bank Aldermore also has two fixed-rate offers in its Family Guarantee Mortgage range.

The Family Building Society offers the Family Mortgage, which uses wider family wealth held in a savings account or in the value of a property to help secure a mortgage for a family member.

Other lenders having guarantor mortgages on offer are the National Counties Building Society (parent company to The Family Building Society), Furness Building Society, Market Harborough Building Society, Newbury Building Society, Hinckley & Rugby Building Society, Kent Reliance, Leeds Building Society, Skipton Building Society, Harpenden Building Society, Holmesdale Building Society, Scottish Building Society, Loughborough Building Society, Stafford Railway Building Society, Newcastle Building Society and Virgin Money.

Scott Sander, mortgage and protection advisor at KFH, comments: “Last year, many lenders started moving away from traditional guarantor mortgage products. In the current climate, it is often better for applicants to consider applying for a joint mortgage with their parent as there is a far greater number of products available to them and there is more chance of them being approved. Age is an issue in most cases, especially if the guarantor or parent is retired, as many lenders won’t consider offering retirees mortgages unless they have a very large pension income that the lender is able to consider.

“There are a few small lenders still offering guarantor mortgage products, but applicants should be aware that the rates offered may be much higher than others available because of the lack of choice. In addition, if you are acquiring a guarantor mortgage, you should be aware that both you and your guarantor will require separate legal advice.”

[box style=”4″]

Aldermore

5.48 per cent two-year fixed-rate mortgage, variable rate for the remaining term (currently stands at 5.73 per cent). The annual percentage rate (APR), which is the overall cost for comparisons, is 5.9 per cent.*

5.68 per cent three-year fixed-rate mortgage, variable rate for the remaining term (currently stands at 5.73 per cent). The annual percentage rate (APR), which is the overall cost for comparisons, is 6 per cent.*

[/box]

[box style=”4″]

The Family Building Society

The Family Building Society’s Family Mortgage range includes two offers, a three-year mortgage fixed at a rate of 3.29 per cent at up to 95 per cent loan-to-value (LTV). After the first three years the product reverts to the society’s managed mortgage rate, currently standing at 4.79 per cent. The APR, representing the overall cost for comparison, is 4.5 per cent. The second product is a 3.79 per cent five-year fixed-rate mortgage at up to 95 per cent LTV. The follow on rate and the APR are the same. Both the three- and five-year fixed mortgage come with a £545 completion fee. The maximum loan size is £500,000.

The Family Building Society offers three ways of backing the mortgage loan, through a family security account, through a family offset account and security through property. Customers can choose one of those options or a combination of them..

[/box]

[box style=”4″]

Bath Building Society

Bath Building Society’s Parental Assistance Mortgage Scheme (PAMS) includes offers at LTVs of 90 per cent and 95 per cent. Bath also has a 5.29 per cent three-year fixed rate mortgage at 100 per cent LTV with £599 product fee. After the fixed term expires, the mortgage moves on a standard variable rate (SVR) of 5.29 per cent. The annual percentage rate (APR), which is the overall cost for comparison is 5.6 per cent. *

[/box]

*All rates quoted were available on 7 May 2015 but may not be now