Getting onto the property ladder is an exciting milestone, however it can be a challenging process. For those struggling to meet the requirements needed to qualify for a mortgage, a guarantor mortgage can be a good option for making that dream of homeownership a reality.
What is a guarantor mortgage?
A guarantor mortgage is secured by a third party, usually a parent, who agrees to guarantee the mortgage and its repayments on behalf of the borrower, usually their child.
A guarantor is liable if the borrower does not make the mortgage repayments and will provide their home or other assets as security against the loan.
Guarantor mortgages for first time buyers are most common for borrowers who cannot get a mortgage on their own.
There are a number of reasons why someone might need a guarantor mortgage, but typical reasons include that they:
- Do not earn enough
- Cannot save a big enough deposit
- Have a bad credit record
Having a guarantor gives borrowers access to guarantor mortgage lenders and a wider range of mortgage options.
This could mean borrowing more from a lender who offers guarantor mortgages or borrowing at a better rate of interest.
How does a guarantor mortgage work?
Many lenders now insist the guarantor is named as a joint applicant on a parent guarantor mortgage.
This is a type of mortgage where parents guarantee that the mortgage will be repaid if their children are unable to do so.
This means guarantor mortgages in the UK now have different names, including:
- Family offset mortgages
- Flexible family mortgages
- Family springboard mortgages
- Joint borrower, sole proprietor mortgages
Who’s responsible?
The borrower and guarantor are both responsible for the mortgage repayments. The guarantor takes on the risk as their home and/or their savings are used as security.
Their home could be repossessed if repayments are not made. A lender will consider the borrower’s credit history and affordability when deciding how much to lend.
Are there any costs?
There could be extra costs when taking out a mortgage with a guarantor. If the guarantor already owns a home, having their name on the deeds would mean they own a second home which would increase stamp duty costs.
Alternatively, a joint borrower, sole proprietor mortgage, where two people borrow but only one name is on the deeds, means that the owner qualifies as a first-time buyer and will not have to pay stamp duty on the first £300,000 of properties worth up to £500,000.
It’s best to seek further independent financial and tax advice if you’re thinking of taking out this type of mortgage.
How much of the mortgage can be guaranteed?
A guarantor can also guarantee part of the mortgage. If they guarantee the entire mortgage the borrower might not need a deposit.
Otherwise, they may guarantee the mortgage amount above 75% or 80% of the property value. If all mortgage repayments are made on time, the mortgage works in the normal way. This means the guarantor does not have to pay anything.
But it’s important to understand that a guarantor could lose their property or other security they used to guarantee the mortgage if repayments are missed.
What are the steps to get a guarantor mortgage?
Like with regular mortgages, there are a few steps you will need to take to get a guarantor mortgage:
- Find a guarantor (this could be a parent)
- Make an offer on a property
- Talk to a mortgage broker
- Choose the right deal
- Apply for a guarantor mortgage
Are there any restrictions?
It’s important to remember that there are a number of restrictions on whether lenders will offer you a guarantor mortgage. These include:
- Where you live (some are only available to borrowers in England, Wales, or Scotland)
- Age (some only accept applicants over 21)
- Deposit amount
- Income, credit history and outgoings
- If the property is your main residence (guarantor mortgages are not available for rental properties or second homes)
- Whether you’re a first time buyer
Has the pandemic impacted guarantor mortgages?
There are usually lots of lenders who offer guarantor mortgages, but the coronavirus pandemic has impacted the mortgage market and it’s much harder to get a guarantor mortgage at the moment as a result.
Many lenders are not offering guarantor mortgages or mortgages with low deposits. The market is changing every day and it could be easier to get a guarantor mortgage in the future.
Miles Robinson is head of mortgages at online mortgage broker, Trussle
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