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.
Mortgage expert at 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 cannot 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. This may sometimes require the guarantor to remortgage their own home, which is obviously a huge commitment on their part.
As the guarantor promises to cover the cost of the mortgage repayments if you cannot, 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.
A guarantor mortgage could be a good option for you if:
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 do not keep up with the mortgage payments it could compromise your guarantor’s credit rating and could even cost them their home.
Mortgage lenders usually only accept family members as guarantors, though a few may accept a close friend.
Your guarantor will need to:
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%.
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 and now Lloyds), 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.
The new (as of January 2019) Lloyds “Lend a Hand” mortgage does a similar thing, but the 10% deposit is instead held in a linked savings account for three years at a rate of 2.5%.
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 will not 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.”
Offered by the Post Office, this could be a good option for you if you do not 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 are not as competitive as those of traditional repayment mortgages, so could end up costing you more in the long run.
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 to 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.
Edited by: Sarah Guershon
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Last updated: 16 May, 2019
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