Even with the housing market’s recent deceleration, the rise of 5% deposit mortgages and the continued popularity of government schemes such as Help to Buy, many are still struggling to get on the housing ladder.
High property prices, particularly in major cities, require huge deposits that are often unattainable for those hammering their cash on rent and rapidly increasing living costs.
In September 2018, HM Land Registry reported the average house price in the UK was £232,554. And with the average deposit standing at 16%, most will need to save a staggering £37,209 to get their first foot on the property ladder.
However, if you’ve a parent or grandparent who is willing and able to help you, then some lenders may still be able to offer you a mortgage without a deposit. One way to do this is via a guarantor mortgage.
What is a guarantor mortgage and how does it work?
Mortgage expert at leading mortgage broker London & Country, David Hollingworth, says: “The traditional guarantor deal was where the lender could consider lending a bit more to a first-time buyer because they had a guarantor in the background. The guarantor would not be a party to the mortgage but would be underwritten.
“Many lenders now look for the parent to be joint on the mortgage as an applicant rather than sit in the background.”
As such, guarantor mortgages now come in different guises – they are sometimes called family, springboard or joint borrower sole proprietor mortgages, but they all amount to the same thing, which is: if you can’t buy a property with a normal mortgage, enlisting the help of a relative might enable you to be approved for a loan, or borrow more than you could on your own. This relative is named as the guarantor.
Rather than simply gifting you a lump sum towards your deposit, a guarantor will put up their own home and/or savings as security on your mortgage.
As the guarantor promises to cover the cost of the mortgage repayments if you can’t, it’s them (not you) who takes on the risk, though both of you are responsible for the mortgage repayments and your credit history and affordability are still taken into consideration.
With a traditional guarantor mortgage, it’s your name on the title deeds and you who’s the sole owner of the property. As such, you’ll need to cover costs such as stamp duty yourself.
Your guarantor will most likely have their own home, so naming them on the deeds would to them constitute as a second home and send the rate of your stamp duty skywards. It would null the first-time buyer stamp duty relief and could mean you jointly pay an extra 3% on top of the normal rates for a first home. On the average £232k home, this could amount to £6,977. One way to avoid this charge is to opt for a joint borrower, sole proprietor mortgage as explained below.
Is a guarantor mortgage right for me?
A guarantor mortgage could be a good option for you if:
- You have a small deposit (less than 10% of the purchase price) or don’t have a deposit at all
- You have a bad credit record
- You have a low income and might struggle to meet the mortgage repayments
The best loan for you depends on your own personal circumstances and those of your guarantor. Having a bad credit rating will still affect your chances of getting a guarantor mortgage. With this in mind, it’s worth trying to first improve your credit score before applying for any kind of mortgage product, as a rejection will have a further negative impact on your credit record.
It’s important that you take your responsibility as a borrower seriously – if you don’t keep up with the mortgage payments it could compromise your guarantor’s credit rating and could even cost them their home.
Who can be a guarantor?
Mortgage lenders usually only accept family members as guarantors, though a few may accept a close friend.
Your guarantor will need to:
- Own their home outright or have a reasonable amount of equity in it (above 30%)
- Have a high enough income to cover the mortgage repayments if you can’t
- Have a high credit rating and substantial credit history
- Take legal advice
What are the different types of guarantor mortgage?
Guarantor mortgages disappeared in the credit crunch after lenders became stricter about who they lent to, but a new generation of guarantor mortgages is now emerging. In the past, the lender usually only let you borrow 75% of the purchase price, whereas now this can stretch to the full 100%.
Springboard or family deposit mortgages
These require a family member to provide a surety equivalent to between 10% and 20% of the property’s purchase price.
The lender offers the purchaser a 95% mortgage, or in some cases (like Barclays), 100% of the property’s valuation or purchase price.
With the Barclays offering, the guarantor opens a special account linked to the borrower’s mortgage and puts 10% of the purchase price into it. This then eliminates the need for the borrower to put down any deposit.
Joint borrower, sole proprietor mortgages
Some lenders, such as Barclays and Metro Bank allow a mortgage to be in joint names but the property ownership to be in one name. This means that even if the property is the second home of the guarantor, if it’s your first home, you won’t have to pay the 3% stamp duty surcharge. Following the 2017 Autumn Budget, first-time buyers are exempt from paying stamp duty on the first £300,000 of properties worth up to £500,00.
These are similar to your average joint mortgage. They give the lender much more security because in theory the lender can go after the guarantor if things go wrong.
“If the guarantor is named on the mortgage, this gives the lender more leverage,” says Ray Boulger, senior mortgage manager at mortgage broker John Charcol.
“The old-style guarantor mortgage used to require the guarantor to have enough income to cover all of the mortgage as well as their own financial commitments. With this new style product, the purchaser’s own income is taken into account. This means that they are likely to be able to borrow more than with the older-style products.”
Family link mortgages
Offered by the Post Office, this could be a good option for you if you don’t have a deposit and your guarantor owns their property outright.
Here, you’ll borrow 90% as a mortgage with 10% as a loan secured against your guarantor’s home.
It’s worth noting rates aren’t as competitive as those of traditional repayment mortgages, so could end up costing you more in the long run.
Family offset mortgages
These work in almost exactly the same way as traditional offset mortgages, except that rather than using your own savings to “offset” your mortgage debt, you use those of a family member instead.
Their savings are linked to your mortgage (both will need to be held with the same lender) and are deducted from it. For example, if your mortgage is £200,000 and your parents have £50,000 in savings, your loan goes down to £150,000.
As a result, you’ll either be paying less interest meaning you could pay off your mortgage sooner, or you reduce your monthly payments making your mortgage more affordable over the full term.
However, if your family member needs access to their savings – which they may not be able to do until your outstanding loan has gone down to 75-80% of the original property price – your mortgage debt goes back up again.
Entering into a guarantor mortgage is not something that should be done lightly, primarily because of the huge risk involved for the guarantor themselves.
Now read our guide on what mortgage you can afford
Edited by: Sarah Guershon