Guide to guarantor mortgages
- With guarantor mortgages, parents or other family members use their savings or home as security for the mortgage
- This type of mortgage is popular for first-time buyers, or for people struggling to move because their credit has suffered in recent years
- Guarantor mortgages can be hard to come by, so speak to a fee-free adviser from London & Country on 0800-073-1959 to explore your options, or request a call back
According to research by the Council of Mortgage Lenders (CML),† in 2014, 52% of first-time buyers received help when buying a home, either from family or through government schemes such as Help to Buy.
Guarantor mortgages and remortgages are one way parents can help children get on the property ladder or move home, but they can only be used in certain circumstances and come with a number of risks.
"We see lots of first time buyers that are buying with help from their parents in one form or another," said London & Country's David Hollingworth.
"Although that will often be through a gift of funds to boost the child's deposit it can also extend to the parent helping them reach the required mortgage amount."
What is a guarantor mortgage?
There are many reasons for this - they may not earn enough in the eyes of the lender, they may have a bad credit rating or they may be a lone buyer.
In these circumstances it may be an option for a parent to step in and act as a guarantor to the mortgage, and such a mortgage can work in a number of different ways.
The guarantor can put a charge against their home or they can use their savings as a guarantee, but the crucial point is that they have to have assets to guarantee the mortgage against.
Alongside the guarantee, the lender takes into account the guarantor's income, debt and savings, just like with any other applicant. They aren't, however, named on the property deeds as an owner, which is what would happen with a joint mortgage.
"By bringing the parental income into play it can help the child reach the mortgage that they need to buy," said Hollingworth.
"That might be as a guarantor where the mortgage is entirely in the child's name but they normally wouldn't qualify for the lending without the back-up of the parent.
"Options for this type of lending are certainly quite limited and the lender will want to see that the guarantor can cover their own commitments as well as any new mortgage.
"They will generally also want the child to have a good chance of taking on the mortgage in their own right in the future, when they are likely to see income rise. It can therefore work for someone like a trainee professional where they can't quite afford the borrowing on their current income, but they are likely to see their income improve in coming years."
Who can get a guarantor mortgage?
Parents and grandparents may be able to become guarantors, but other family members (aunts or uncles, for example) or friends might not be allowed to help. Check with your lender to see who's allowed to be named as a guarantor.
Guarantor mortgagees may have to have their own mortgages or own their own homes, so if parents aren't homeowners they won't be able to be named as a guarantor.
Products marketed as 100% mortgages are usually guarantor mortgages. If the borrower hasn't got a deposit, the guarantor can offer their own property or savings as security to cover the deposit percentage.
Risks of a guarantor mortgage
Becoming a guarantor can be a big risk - if the borrower defaults on the mortgage payment the guarantor will become liable for any payments. If they've put their house up as a guarantee for the mortgage, this may put their own home in danger.
The guarantor is usually tied-in to the mortgage until such a time as the borrower has reduced the loan to value of the mortgage to a certain amount; this is sometimes 80%, but it can be more. A guarantor mortgage is therefore a long-term commitment that can span decades.
Credit record connection
A guarantor mortgage also connects people's credit records, which may be an issue if either party has a bad credit rating or if their credit rating suffers in the future.
Alternatives to guarantor mortgages
There are a number of ways parents can help children buy a home, and guarantor mortgages are just one of them. Alternatives include gifting a deposit, offsetting savings or taking out a joint mortgage with them.
If none of these things are possible, it might just be a case of waiting and saving a larger deposit.
Remember that if parents are keen to help they can do so without money, for example by providing cheaper accommodation in their own home while children are saving.
Speak to a financial adviser
It's worth seeking advice before acting as guarantor, perhaps from an independent financial adviser who could help explain the options.
It's also worth speaking to a mortgage adviser, as they may be able to advise you on the right choice and the right mortgage product for your needs.
By Emily Bater