Whether you're a first-time buyer exploring financing options, or a seasoned homeowner seeking alternative borrowing solutions, this guide is your roadmap to understanding how guarantor mortgages work.
Read on to learn the benefits of guarantor mortgages, the potential drawbacks, and how to navigate the application process with confidence.
What is a guarantor mortgage?
A guarantor mortgage is a family-assisted mortgage, where a parent or elder relative with a good credit score or income can support a mortgage by acting as the guarantor.
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How do guarantor mortgages work?
A guarantor mortgage is very similar to every other mortgage; you are still making monthly repayments.
The difference with a guarantor mortgage is that you are using the guarantor’s positive financial situation as collateral only if the borrower cannot pay.
These mortgage deals are most popular with first-time buyers because their parents or relatives can support them, helping their children get on the financial property ladder quicker.
If a regular mortgage cannot be repaid, the home is usually reclaimed. As with a guarantor mortgage, if the payments cannot be repaid, they turn to the guarantor to support and fulfil these payments. This allows the lender to have protection against losing the repayments within the mortgage deal.
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What is a guarantor?
A guarantor is someone who will guarantee to take responsibility for the mortgage repayments if the borrower fails to do so.
Having this backup allows people to apply for a first-time mortgage or a larger mortgage without certain requirements.
This can occur if they cannot provide a large deposit, income or have a negative credit score. Having this guarantor mortgage can even allow people to become eligible for a 100% property-value mortgage by using the guarantor as collateral.
Who can guarantee a mortgage?
A guarantor needs to be in a positive and stable financial situation where they can support someone’s mortgage.
They can be at work, self-employed, or even retired; they just need to prove they are financially stable, allowing them to become eligible.
A guarantor needs to be at least 21 to 75 years old. This age restriction is put in place so young people and elders cannot be taken advantage of. A mortgage can last around 25–40 years, meaning a guarantor over 75 may not be here in the future to repay the mortgage lender.
What types of guarantor mortgages are available?
Savings as security guarantor mortgage
There is a savings as security guarantor mortgage, which involves a chosen guarantor placing between 5-20% of the property’s value in a savings account; this is dedicated to the guarantor mortgage.
This will assure the mortgage lender that there is money available to make the repayments if needed. This money can be returned from the dedicated savings account once the mortgage has been paid off by a certain percentage.
Property security guarantor mortgage
Another type is a property security guarantor mortgage. This is where the guarantor has a large amount of equity in a property or has no outstanding mortgage.
The guarantor will place their home as collateral, so if repayments aren’t paid for a long period of time, this could mean the guarantor's home could potentially be repossessed.
Advantages of a guarantor mortgage
Guarantor mortgages are a great way to get onto the property ladder if you are a first-time buyer. It reduces the lender's risks greatly, allowing the first-time buyer to have a larger mortgage than expected, increasing their availability of property choices.
If you haven’t got a home deposit saved, a guarantor mortgage allows you to borrow the 100% property value mortgage. This is made accessible within a guarantor mortgage because they can afford the monthly repayments, but they don’t have the deposit needed to purchase a home.
Related: First-time buyer’s guide to household bills
Disadvantages of a guarantor mortgage
Guarantor mortgages create a lot of risk for the guarantor. If the sole borrower and guarantor fail to pay the mortgage repayments, it can lead to a bad credit score, a loss of savings, and a potential home repossession.
If the guarantor can’t cover the monthly payments, the lender will go to extreme lengths to get their money back. If the guarantor refuses to make repayments, this will be a breach of the contract, allowing the lender to take legal action against the guarantor and borrower.
So, before signing your name as a guarantor, ensure you are both prepared for the consequences you could potentially face if you don’t abide by the contract.
Is a guarantor mortgage right for you?
If you are a first-time buyer with little to no deposit or a buyer with a poor credit score, this is a great alternative to securing a mortgage.
Mortgages are difficult to secure when you have a poor credit score or less than a 5% deposit on the property you desire. So having a guarantor allows the lender to reduce their overall risk when offering you a mortgage.
If you’re considering a guarantor mortgage, we recommend ensuring that both parties are financially stable and prepared to pay the monthly repayments. This allows you to use the guarantor mortgage to its full benefit.
Contact us today for more information on mortgages and how to buy your first home.
