What is a guarantor mortgage?
A guarantor mortgage is a way of securing a mortgage when you lack the required deposit or have financial circumstances that may discourage lenders. When someone agrees to act as a mortgage guarantor for you, they commit to covering the repayments if you fail to keep up.
Sometimes called a family assisted mortgage, a guarantor mortgage is a way for parents (or grandparents) to help their children on to the property ladder.
The guarantor will not own a share of the house, and they won’t be named on the deeds. Being a guarantor simply means signing a legal agreement to cover mortgage repayments if the actual borrower falls behind.
Who is a guarantor mortgage suitable for?
A guarantor mortgage is suitable for:
- A borrower with no deposit or a small deposit, typically a first-time-buyer
- A borrower with a low income
- Someone with a low or non-existent credit score
- Someone who wants to buy a property that costs more than lenders think they can afford.
Who can be a guarantor for a mortgage?
A guarantor generally needs the following:
- To own their own property or possess enough equity to satisfy the lender
- A high enough income to cover the cost of mortgage repayments if required
- A strong credit record.
A guarantor needs to possess sufficient assets to offer as part of the legal guarantee. Becoming a guarantor on a mortgage may mean you sign over a charge on your own home, giving the lender the ability to repossess it if payments are not met.
Alternatively, a guarantor can offer their savings as way of guarantee. In this instance, the guarantor would put a lump sum into a savings account held by the mortgage lender. The savings cannot be accessed until an agreed amount of the mortgage has been paid off. Typically a guarantor will be released from the mortgage agreement once the loan to value level on the property has decreased to around 80%.
Although the guarantor cannot touch the allocated savings during this time, the amount can usually accrue interest on their behalf.
Do you need a deposit for a guarantor mortgage?
Some lenders give mortgages with a loan to value (LTV) of 100%, meaning if you have a willing guarantor you might not need a deposit at all. Other lenders require a deposit for a guarantor mortgage, the level of which will vary. If you know exactly how much funds you have available, it will be much easier to compare what’s out there.
What happens if I miss a payment?
Missing a mortgage repayment is never ideal, but with a guarantor mortgage it’s particularly important to be aware of what might happen if the payments aren’t met.
If you fall behind on your mortgage repayments, there are several things that could happen:
- You are given more time to make your repayments
- You’re charged a fee
- Your lender asks your guarantor to make the repayment on your behalf.
If you continue to miss your mortgage repayments, further actions could include:
- An extension of the period of time your guarantor cannot withdraw from the savings account associated with the mortgage
- Money could be removed from the savings account associated with the mortgage
- Your house could be repossessed
- If the lender is still owed money after the repossession of the house, they could go on to repossess your guarantor’s home or take other action to recover the debt.
Tips for entering into a guarantor mortgage
- Be open about your circumstances. Honesty is important in financial situations, so it’s vital to be open with your guarantor, or with the person you are promising to be guarantor for. All possible outcomes should be considered.
- Use a solicitor. A mortgage is a big commitment and money matters can be complicated. Formal agreements remove the possibilities for grey areas, and might save you from difficult situations down the line.
- Respect boundaries. If you agree to be a guarantor, it’s important to remember that the house is not your home. Trying to enforce rules or expecting to have a say in certain matters could lead to a falling out with the owner.
Find out about other types of mortgages here.