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 an independent financial adviser for further advice
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 can give parents a way of helping children to get on the property ladder or move home, but they can only be used in certain circumstances and come with a number of risks.
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.
If you've already owned a home but your credit rating has suffered in recent years, you could find that you've become a mortgage prisoner.
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.
Need more information?
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.
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.