Could a Guarantor Mortgage Be Your Path to Homeownership?
In these difficult times of rising house prices and strict lending criteria, buying a house can sometimes seem like an uphill struggle. A guarantor mortgage could be one option available to you to help you get onto the property ladder or help you secure a larger home loan. Using a guarantor can increase your borrowing power and make your dreams of buying a property a reality. In this guide, we’ll outline what you need to know about the advantages and risks of a guarantor mortgage and what you need to do to apply for one.
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What is a guarantor mortgage?
Also known as a family assisted mortgage, a guarantor mortgage in the UK is a type of mortgage designed to help individuals get a mortgage and a foot onto the property ladder.
Many people struggle to meet standard mortgage affordability criteria on their own, such as first-time buyers or borrowers with low income or poor credit and a guarantor mortgage, typically with a family member, parent or close relative acting as a guarantor, provides additional financial security to the lender. The guarantor essentially promises to cover the mortgage repayments if the borrower cannot make them.
This therefore means, that the mortgage that you may not be able to achieve on your own, whether because of bad credit or affordability, now increases your opportunities.
Benefits of Guarantor Mortgages for First Time Buyers
Affordability can be a significant concern for first-time buyers, especially young people. When you are at the start of your career path, you may have a lower income, which can represent a major hurdle to buying a home. Securing a guarantor mortgage could be a way around that issue, allowing a first-time buyer to:
- Get a larger mortgage than one based on their income
- Obtain a better interest rate, even in the case of a limited credit history
- Provide a smaller deposit amount, even as low as 5%
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How Does a Guarantor Mortgage Work?
A guarantor mortgage is a way to borrow money to buy a property, similar to a conventional mortgage, but with a key difference: a guarantor.
The guarantor agrees to take responsibility for the mortgage if the borrower cannot meet the mortgage payments for some reason.
The guarantor isn’t required to provide any funds upfront, however, their assets, such as property or savings, are used to guarantee the mortgage.
What Responsibilities Does the Guarantor Have?
The guarantor plays a crucial role in the mortgage arrangement because if the borrower is unable to make the mortgage payments, the guarantor becomes responsible for the loan.
Being a guarantor is a big commitment, as they are legally obliged to take over the mortgage debt if the borrower defaults. Potentially, the lender could seize the guarantor’s assets, savings or home.
It’s a serious commitment so it’s important that the borrower and the guarantor understand the implications of what they are agreeing to.
Who Can Be a Guarantor for Mortgage?
A lender will have certain eligibility criteria that a potential guarantor will need to meet. In general, you will:
- Be a homeowner yourself, and/or
- Have significant savings
- Have a good credit rating and credit history
- Be financially stable
- Have the means to cover the mortgage payments in the event of a default
- Usually, be over 21 and under 75 years old
Technically anyone can act as a guarantor provided they meet the lender’s eligibility checks, but typically a guarantor will be a parent, grandparent, close relative or friend. This type of mortgage is also sometimes known as a family-assisted mortgage or a parent guarantor mortgage.
The application process is similar to a standard mortgage. however as well as performing credit and eligibility checks on the borrower, additional checks are made on the guarantor. Lenders want to be assured that both the borrower and the guarantor are able to cover the mortgage and repay the loan. Typical applicants who will most benefit are often: The main benefit of this type of arrangement is a way for the lender to be able to offer a mortgage to a customer who otherwise might be deemed too risky to the lender. Having a guarantor secure the mortgage payments in the case of a potential default effectively reduces the risk to the lender. A guarantor will usually stay on the mortgage either for a pre-agreed length of time, or even for the entire life of the mortgage. Once the cooling off period has passed (usually 14 days) the guarantor can only be removed if the lender agrees. If circumstances change for the borrower which puts them in a stronger position financially, they can request the guarantor be removed but this will be at the discretion of the lender. Being a guarantor may affect your ability to take out a mortgage because a potential lender will take into consideration what impact it would have on your finances if you were to be called upon to take over the mortgage if the borrower defaults. What Is the Application Process for a Guarantor Mortgage?
Who Is Most Suited to a Guarantor Mortgage?
How Long Does a Guarantor Stay on a Mortgage
Does Being a Guarantor Affect Mortgage Applications?
How To Improve Your Chances of Getting a Guarantor Mortgage
There are some things you can do to increase the likelihood of being approved:
- Save up a larger deposit
Having a larger deposit amount will show that you are committed to the mortgage and will help the lender to view you more positively in terms of risk.
- Improve your credit
Do everything you can to make sure your credit score is as good as possible. Check your credit file and have anything that is inaccurate removed. Pay off any existing debts and ensure payments to creditors are paid regularly and on time. Even small changes can improve your credit score so it is worth doing.
- Choose a strong guarantor
Having a guarantor with a good credit score and credit history will work in your favour with a lender.
Frequently Asked Questions
Both the borrower and the guarantor are credit checked, but this shouldn’t negatively affect your credit score.
The main obvious risk is that if the borrower defaults on the mortgage you become responsible. This could even put your assets such as savings and/or property at risk.
There are several alternatives for customers, including a joint borrower sole proprietor mortgage.
With a joint borrower sole proprietor mortgage, the borrower and joint borrower are both responsible for the mortgage payments, but although the joint borrower’s income is taken into account for the loan amount, the borrower is the sole owner of the mortgage. It should be noted that if payments are missed, the joint borrower’s credit will be affected.
The joint borrower has no ownership rights on the property, and they can be removed as joint borrower if the borrower can meet the payments on their own.
A mortgage broker has the expertise, experience and contacts to be able to help you to find a suitable lender for your mortgage application. Here at The Mortgage Broker we have years of experience in all types of specialist mortgages and our friendly team is waiting to help you with your mortgage enquiries. Contact us today for more information.
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Guarantor Mortgage or a Joint Borrower Sole Proprietor (JBSP) Mortgage
Struggling to afford a mortgage on your own? Here is a quick look at the two main options for getting support with your Mortgage affordability. Speak with The Mortgage Broker today to understand which is more suitable for you. We have vast amounts of experience in this field and can support you in getting on that property ladder.
The key differences:
| Product | Guarantor Mortgage | Joint Borrower Sole Proprietor (JBSP) Mortgage |
|---|---|---|
| Role of Mortgage Supporter | The guarantor guarantees the loan if the borrower can’t pay but doesn’t make monthly repayments. | The joint borrower helps with monthly repayments from the start. |
| Ownership | The borrower owns the property; the guarantor has no ownership rights. | The borrower owns the property; the joint borrower has no ownership rights. |
| Affordability | The guarantor’s income or assets are considered as a safety net but not included in affordability checks. | The joint borrower’s income is included, helping increase the amount the borrower can borrow. |
| Repayment Liability | The guarantor only has to make repayments if the borrower defaults. | Both the borrower and the joint borrower are responsible for making repayments from the beginning. |
| Collateral | The guarantor may need to provide assets (like savings or property) as security for the loan. | No need for the joint borrower to provide any assets as security. |
| Impact on Supporter | If the borrower defaults, the guarantor’s credit could be affected, and they could lose any collateral. | If repayments are missed, the joint borrower’s credit will be affected, as they share full liability. |
| Exit Strategy | The guarantor can be removed from the mortgage once the borrower’s financial situation improves. | The joint borrower can be removed once the borrower can afford repayments on their own. |