A guarantor mortgage is one way that you might be able to buy a home, even if your finances mean that a traditional mortgage isn’t an option. Guarantor mortgages can provide a means of improving your acceptance chances and offer a way to borrow a higher amount. Find out more in our guide to guarantor mortgages, and compare our best guarantor mortgage offers below.
Lloyds Bank 2 Year Fixed mortgageInitial rate 4.4%. APRC 4.5%. Set-up fees £0
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If you borrowed £200,000 payable over 25 years, with an initial fixed-rate for two years at 4.79%, your monthly payments would be £1,144.84 for 24 months. This would then revert to a standard variable rate (SVR) of 4.24% for the remaining 23 years, costing £1,086.24 per month for 276 months. Overall cost for comparison is 4.5% APRC representative. The total amount payable over the full term would be £328,272, including product fee of £995 and interest of £127,277.
Your home may be repossessed if you do not keep up repayments on your mortgage.
Even with schemes such as Help to Buy many people are still struggling to get on the housing ladder.
High property prices, particularly in major cities, lead to the need for huge deposits that are often unattainable for those hammering their cash on rent and day-to-day living costs.
However, if you have a parent or a grandparent who is willing and able to help you, some lenders may still be able to offer you a mortgage without a deposit. One way to do this is via a guarantor mortgage.
A guarantor is typically a family member who offers to take on some of the financial risk of a mortgage in order to help you, as the main borrower, to get mortgage approval or to borrow a higher amount of money than you may otherwise be able to borrow.
A guarantor mortgage is a home loan which involves a third party – usually a parent or a grandparent – providing security and taking on some of the mortgage risk by acting as a guarantor for the main borrower.
Usually, the guarantor will offer their own home as security, meaning it can be repossessed if the worst comes to the worst, although sometimes guarantors pledge their savings as security instead. The guarantor additionally agrees to meet the mortgage payments if the main borrower defaults.
As with all mortgages, if there are no problems for the borrower then the security remains untouched. However, a guarantor provides the lender with confidence to make the loan to the main borrower where they may otherwise not agree to do so.
Guarantor mortgages can offer an option for borrowers who have a poor credit history or no credit history, or who are unable to put down a deposit. These borrowers are seen as being riskier for lenders to deal with, which is why they look for the extra security.
It’s usual for a guarantor to be a family member, although the requirements will vary depending on the lender. Guarantors must own their own home outright, or at least own enough equity in their home to meet the minimum requirements of the lender.
Guarantors also have their own credit records checked by the lender, even though it is not them who are borrowing the money. The lender needs to be sure that the third party standing behind the mortgage has a good track record.
There is no set requirement for how much a guarantor needs to earn. However, if they are still paying their own mortgage, they will need to prove to the lender that they can cover the cost of both mortgages if the new borrower starts to fall behind on repayments.
Some mortgage lenders will not offer a mortgage to potential borrowers as their income isn’t high enough. Certain guarantor mortgages will include your guarantor’s income in the calculation, so what they need to earn will depend on how much you are looking to borrow.
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, 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.
There are different types of mortgages with a guarantor and they all have slightly different criteria, although there are four main categories of guarantor mortgage.
This type of mortgage requires a family member to lodge savings in an account with the lender, worth an equivalent of between 10% and 20% of the property’s purchase price.
The lender offers the purchaser a 95% mortgage or, in some cases, 100% of the property’s valuation or purchase price.
The money in the savings account remains untouched if the mortgage repayments are made on time, and they earn interest in the meantime. However, the savings account is tied up with the lender for a minimum period of time in lieu of a deposit from the main borrower.
When you take out a joint borrower, sole proprietor (JBSP) mortgage, the mortgage will be in joint names but the property ownership will be in one name. This means that even if the guarantor already owns a home, if it’s your first home you still qualify as a first-time buyer and you won’t have to pay the 3% stamp duty surcharge. A deposit is still required for this type of mortgage, with the minimum deposit requirement varying from provider to provider.
A JBSP mortgage is similar to a typical joint mortgage and gives the lender security because they have the option to pursue the guarantor if payment defaults.
If you do not have a deposit and your guarantor owns their property outright, you may be able to take out a family link mortgage. Where your guarantor owns their property outright (or owns a high proportion of their property), their property is used as security and a bank charge will be placed against their home. 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 interest purposes. For example, if your mortgage is £200,000 and your parents have £50,000 in savings, you pay interest on only £150,000 of the mortgage.
As a result, you’ll either be paying less interest (meaning you could pay off your mortgage sooner), or you reduce your monthly repayments, 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.
It’s important for any potential guarantor to consider the impact of being a guarantor on their own finances. Being a guarantor means that you guarantee the main borrower’s loan, which can have serious financial consequences if the main borrower fails to make the repayments.
Being a guarantor can have an impact on your ability to take out an additional mortgage, as any lender will look at your affordability and this will include the debts that you have guaranteed. If the main borrower defaults on any payment, your credit score can also be affected. For this reason, it can be helpful to seek advice before committing to guarantee a loan.
You can find a mortgage lender that offers guarantor mortgages using our comparison tool. Often, mortgages with a guarantor will require both the borrower and guarantor to obtain advice from a solicitor and a mortgage broker to ensure that the guarantor option is most suitable for your needs.
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Last updated: 22 October, 2020