Types of guarantor mortgages guide
A guarantor mortgage is a great way to get a loan on a property if you’ve just missed the eligibility criteria or would like to see if you can get a mortgage deal. In this article, we’re going to work through the different guarantor mortgages out there and cover guarantor mortgages in more detail.
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How guarantor mortgages work
Below will cover this unique mortgage deal which can help kickstart a young prospective property owner’s journey.
Most have come to understand guarantor mortgages as family-assisted mortgages because, typically, you’d find parents are taking on responsibility for mortgage payments should their child fail to pay. However, the guarantor can be anyone who is 21 years old or older, has a high income, a good credit score, and ideally owns a property of their own.
This can include:
- A friend,
- A colleague,
- Your spouse,
- And, of course, a family member such as an aunt, uncle, sister, or brother.
As you can see, these mortgages offer a decent amount of flexibility regarding who can be your guarantor, and that person doesn’t necessarily have to be a family member. All lenders require is someone who agrees to assume liability for mortgage repayments should the borrower fail to meet their payment obligations.
Ideally, a guarantor should be financially stable and have been so for an extended period. The better the guarantor’s situation, the better your mortgage deal could be. In addition, because mortgages are typically around 25 years long, older guarantors may find their age a stumbling block. Lenders want certainty, so this is understandable.
Like any other home loan, if the borrower and, subsequently, the guarantor fails to make mortgage payments, the lender will be allowed to repossess your property.
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Is there a way to avoid down payment?
Avoiding a down payment, also called a 100% mortgage, is an entirely reasonable goal if your and your guarantor’s financial status is good. Although, lenders will consider many other variables, including:
- Your and your guarantor’s age,
- Your and your guarantor’s credit history,
- And whether you are a first-time buyer.
It’s all a risk evaluation on the lender’s part, and they need to ensure that they’re making a rational choice by loaning you the money. Consider, if you have zero credit history, how much this might impact what kind of deal a lender can offer you, even with a guarantor. Or think about how having recently been declared bankrupt might affect their decision-making.
Along with a guarantor mortgage, you may also be able to get Support for Mortgage Interest (SMI), which helps homeowners pay the interest on their mortgage. This is a government incentive provided for certain qualifying applicants.
The different guarantor mortgages
Now that we’ve gone into a bit more detail about guarantor mortgages, let’s start by exploring the different options and how a guarantor can support you on your journey to getting a new home.
Whole loan
Typically, you’ll find that most lenders require guarantors to be able to afford the entirety of the mortgage; this is called a whole loan and is the most common guarantor criterion. It requires that the guarantor proves they can afford the entire loan should the borrower be unable to meet payments.
A whole loan requires that the guarantor is in an excellent financial situation, which can be a challenge if the guarantor already has their own mortgage to pay, for instance. It may also prove a challenge if the guarantor is soon to be retired.
Shortfall
This is a less common type of guarantor mortgage but remains a possibility depending on the lender you select. Here, the guarantor will be required to cover a surplus amount that the borrower cannot afford.
Security options for a guarantor mortgage
Now that we’ve explored the different monetary commitments guarantors can get into, let’s start looking at what type of security guarantors may be able to offer so that borrowers can get a better deal.
In this case, the guarantor provides an extra layer of security for the lender if the borrower forfeits their loan.
Savings as security
This option requires the lender to put money into a savings account linked to the mortgage at an amount between 5-20% of the property price. The guarantor’s savings will be inaccessible to them. They must be held for several years or until the amount the borrower owes drops below a particular percentage of the property value.
Should the borrower miss a mortgage repayment, the lender may be able to keep the savings for an even more extended period. In fact, if they eventually had to repossess and then sell your property but could not get as much as you owed, they could get the difference from the savings.
The benefit of this type of security arrangement for the guarantor is that the money continues to earn interest over time.
Property as security
This type of security could be highly costly to the guarantor if the borrower fails to make their mortgage repayments, as they risk even losing their own home. While the lender will start by repossessing the borrower’s home, they can sell the guarantor’s property if they fail to get the amount lent.
This means that the guarantor will need to own the majority of their property to be able to use it as security.
Guarantor mortgages for parents
In most circumstances, the guarantor is a parent interested in helping their child climb the property ladder. Let’s explore the two different options available for parents:
Joint mortgages
Joint mortgages let parents help their children buy purchasing the property with them. It also means that both names will be put on the mortgage loan and the property. Unfortunately, if a parent already owns a home they will have to pay stamp duty, which can be thousands of pounds.
JBSP mortgages
A Joint Borrower Sole Proprietor Mortgage (JBSP) lets parents and children pay together, just like a joint mortgage, but with one key difference: only the child’s name will be on the property deed. The advantage is they can avoid the potentially very costly stamp duty surcharge.
Offset mortgages
An offset mortgage is when the guarantor puts money into an account tied to the mortgage. The amount of money in the account will then offset the loan you’re required to pay interest for.
Take, for example, a loan of £300,000. Now, if the guarantor has £80,000 in a linked savings account, you’ll only have to pay interest on £220,000.
Unlike savings as security, which we’ll cover soon, offset mortgages don’t earn any interest, and the money is held away for an extended period.
Can a guarantor abandon their commitment?
A guarantor may be able to end their commitment prematurely in certain situations. For example, if the borrower’s financial situation has improved, enough time has elapsed, or certain conditions have been met, then it may very well be possible. This would have to be subject to specific criteria in the contract or based on approval by the lender.
Remember, the guarantor is as bound by the terms of the mortgage contract as the borrower is. Another variable to consider is the type of commitment the guarantor is attached to. A Joint Borrower Sole Proprietor Mortgage (JBSP) will not allow for a lot of flexibility as both the borrower and the guarantor must fulfill the terms of the mortgage.
FAQs
Why get a guarantor mortgage?
A guarantor mortgage can help you get a mortgage if you’re relatively young and perhaps don’t meet every single one of the eligibility requirements. They can also help you get a better deal if you’re a first-time buyer.
Can I get a guarantor mortgage if my parents are retired?
Well, it certainly does impact your chances; however, it’s not uncommon for guarantor mortgages to simply be security in the form of a savings account or property, so it shouldn’t be an issue. Additionally, it won’t be a problem if your parents have a great retirement income: the older they are, the more reluctant mortgage lenders will be.
How much can you borrow with a guarantor mortgage?
How much you can borrow with a guarantor mortgage depends on various factors, including your financial situation, age, credit score, and those of your guarantor. A mortgage lender will assess this before even giving you an offer. It’s not impossible to get a 100% mortgage with the help of a guarantor.
Who can be a mortgage guarantor?
A mortgage guarantor will typically be a family member; however, they can technically be anyone. It doesn’t matter because, at the end of the day, that person becomes as bound to the contract as you are. The most significant restriction is just age, as the guarantor has to be able to see through their commitment.
Who are guarantor mortgages suitable for?
Guarantor mortgages are perfect for young professionals with parents willing to act as their guarantors and help them climb the property ladder. In most guarantor mortgage arrangements, the parent will not have to pay anything but need only serve as a fallback should their child fail to pay.
How does a guarantor mortgage work?
There are different kinds of guarantor mortgages out there. For instance, sometimes, the guarantor will have to use money in a savings account or their property as a guarantee. Most of the time, however, the mortgage guarantor must make the monthly repayments should the borrower fail to make theirs.
Your mortgage experts
Our team at Loan Corp is ready and able to assist you with all your guarantor mortgage queries and concerns. Contact us today at 0808 301 9509 or complete our online form to get in touch with a mortgage broker.
We intend to respond to your message within 2 hours from Monday to Friday, 8 am to 5 pm, or 4 hours over the weekend and on bank holidays.
Sources:
https://www.moneysupermarket.com/mortgages/guarantor-mortgages/
https://www.onlinemortgageadvisor.co.uk/guarantor-mortgages/a-guide-to-guarantor-mortgages/
https://www.onlinemortgageadvisor.co.uk/guarantor-mortgages/who-can-be-a-guarantor/
https://www.unbiased.co.uk/life/homes-property/how-do-guarantor-mortgages-work