Guarantor mortgages

What is a guarantor mortgage?

If you don’t have a deposit or you have a bad credit rating, a guarantor mortgage can help you to get on the property ladder.

These mortgages work by a parent or close family relative guaranteeing the mortgage by using their property or savings as security.

It’s possible for a guarantor to guarantee 100% of the mortgage, so you won’t need a deposit, or they can guarantee part of the mortgage, usually 75% or 80%. 

Acting as a guarantor can be risky though, as both they and you will be responsible for the mortgage repayments. 

If the repayments aren’t met the lender can repossess and sell your home. If this doesn’t cover what you owe, the shortfall can be taken from your guarantor’s savings or property, depending on what they used to guarantee the mortgage.

Who are guarantor mortgages suitable for?

A guarantor mortgage may suit you if you have:

• A low income - it could be too low to meet the bank or building society’s lending criteria and so prevent you from having a mortgage
• A small or no deposit - standard mortgages often require deposits of up to 20%, but with a guarantor mortgage it’s possible to borrow 100% of the property’s value
• A poor credit score - you might have a bad credit rating if you’ve missed credit card or loan payments in the past
• Little or no credit history - if you’re new to the country, or if you’ve never had a credit card or a loan, you might not have enough of a credit history

Who can be a mortgage guarantor?

Most lenders want the mortgage guarantor to be a close family member, usually the buyer’s parents or grandparents.  

There’s a strict set of eligibility criteria and a mortgage guarantor will usually need to have:

• Their own property or savings - this shows their ability to make regular payments or having an asset that could cover the mortgage cost
• Good credit history - the lender needs to have confidence the guarantor is financially reliable 
• Received legal advice about the risks - it’s important the guarantor has legal advice to completely understand the risks involved

Some lenders will insist the guarantor owns their property in full and has paid off their mortgage, while others will settle for the guarantor having a certain amount of equity - for example, owning over 50%.

Risks of a guarantor mortgage

Security of the guarantor’s home

Becoming a guarantor can be a big risk - if you, as the borrower, are unable to make the mortgage payments the responsibility for covering the cost will lie with them. 

If the guarantor has used their house as a guarantee for the mortgage, this may put their own home at risk.

Long term commitment

The guarantor is usually tied into the mortgage until enough payments have been made to reduce the mortgage loan-to-value to a certain amount - this is sometimes 80%, but it can be more. This means a guarantor mortgage can potentially span decades.

Credit record connection

A guarantor mortgage also connects people's credit records. If either party has a bad credit rating, or suffers with poor credit in the future, this can affect the other’s credit score and impact their ability to borrow money, whether a loan or credit card.

What happens if a guarantor can’t pay?

This doesn’t happen often as lenders carry out very thorough investigations into whether a guarantor will be able to make repayments. 

If payments have to be made by the guarantor and they’re unable to provide the money, your lender will look into why they can’t or won’t pay.

If a guarantor refuses to pay - perhaps because of a family dispute - they will be in breach of their contract. The lender can take legal action against them and their home could be at risk.

When both the borrower and guarantor can’t make repayments - for example, due to a change in financial circumstances - again they’re breaking the agreed contract and the consequences can be serious.

Be open with your lender - there’s a good chance it’ll work with you to find a solution. It’ll discuss the situation with you and explain the next steps to recover the debt.

What are the alternatives to a guarantor loan?

There are a number of ways parents can help children buy a home, and guarantor mortgages are just one of them. 

The alternatives include:

A gifted deposit

Parents, or a family member, of a homebuyer can give them a sum of money towards the deposit, or give them the entire deposit. But there must be an agreement that the homebuyer won’t need to repay the money, and that the person gifting the deposit won’t have a stake in the property.

A gifted deposit increases how much the homebuyer has to put down on a home and can help them access better mortgage deals and reduce their monthly repayments.

Offsetting savings

Family offset mortgages link a family member’s savings account - usually the parent’s or grandparent’s - to the homebuyer’s mortgage. 

The amount in the savings account reduces the mortgage total, making repayments cheaper. Once a set amount of the mortgage has been paid off, usually around 75%, the owner of the savings account can access their money again.

Joint mortgage

Parents or family members could take out a joint mortgage with the homebuyer. Combining incomes can maximise the size of mortgage available, spread the cost and help buyers access more mortgage deals. Some lenders allow up to four incomes on one mortgage. 

Other options

If your parents can’t help financially, there are government schemes - including Help to Buy or shared ownership - which might help. 

If none of these options is possible, it might just be a case of waiting until you’ve saved for a larger deposit.

Remember that if your parents are keen to help they can still do this without money, for example by letting you stay in their home while you’re saving.

Speak to a financial adviser

It's a good idea to seek professional advice before acting as guarantor, perhaps from an independent financial adviser who could explain the options.

It's also worth speaking to a mortgage adviser, as they may be able to help you find the right mortgage product for your needs.