Guarantor mortgages are an effective way of getting yourself onto the property ladder with an extra helping-hand. With a guarantor mortgage, a parent, guardian or close family member guarantees the mortgage debt. This is often done by using the guarantor’s property as collateral against the debt.
There are a greater choice or Guarantor mortgages on the market now that limit the amount of debt the guarantor is liable for, lowering the potential risks involved should payments be defaulted. Of course, if the payments are made without fail, then it won’t cost the guarantor a penny. Guarantor mortgages are still available in the current market place, with approximately 40% of lenders offering this type of facility. In general, the guarantor must be a close family member, such as a parent and other factors may be considered.
Examples of these factors, as well as the different varieties of Guarantor Mortgages, are as follows (although these vary from lender to lender):
- The guarantors must be able to demonstrate that they can afford the new deal and their own residential mortgage.
- The applicants must be in a position or occupation that will allow then to take the mortgage on in their own right within a 5-year period.
- Some lenders will only offer ‘guarantor’ deals to professionals only.
- The term of the mortgage will differ from lender to lender, for example some lenders have a maximum age of the guarantor of 60 years old but they will not limit the term of the loan. Other lenders will have no maximum age of the guarantor but will request that the loan finished before the age of 75.
- Loan to values differ between lenders but it is possible in the current market to get a 90% deal with a guarantor.
- The guarantor does not have to be on the title deeds for the application to be acceptable.
- A guarantor, depending on the lender will either have full liability for the loan or limited liability – For example a guarantor can be used as a ‘top up’ where an applicant can afford 70% of the costs and the guarantor is then only needed for the remaining 30%.
Joint Mortgages – Parents and children buying together
- This type of structure is still available by all lenders subject to the maximum number of applicants. Some lenders will only accept a maximum of two applicants which doesn’t help a parent assisting their daughter and son in law. Other lenders will accept 4 applicants allowing for this structure to take place.
- Most lenders who accept more than 2 applicants will only take the income of the top two income earners into accounts when assessing affordability. Some however, will take 3 incomes into account when needed.
- Where more than two applicants are needed this can slow down the application process as some lenders will only accept paper based applications.
Remortgaging own home to provide a deposit for children
- All lenders will provide this service and allow capital raising for this purpose subject to meeting the lenders criteria including affordability, credit score etc.
- The proceeds of this remortgage would then fall into the ‘gifted deposit’ scenario as explained above.
- A remortgage, further advance or second charge would all be options available to the parents to release some equity. A second charge would be the last resort as generally these are much higher priced than a remortgage of further advance.
- Subject to age and income this type of refinancing is simple and straightforward. If your new mortgage ends before your 65th birthday all lenders will consider providing the funds. The number of lenders gets more restrictive if the term ends by your 70th birthday and is restricted even further if the mortgage term ends between your 70 and 75th birthday.
- If you are capital raising to provide a deposit the lower your loan to value the better and more competitive the interest rates are. Loans up to a maximum of 60% usually offer the most competitive deal and they get slightly more expensive the higher the loan to value gets in 5% levels. E.g. 65% is more expensive than 60%, 75% is more expensive than 70% and so on.
- Remortgaging is a pretty cost-effective route to explore as most lenders will offer a free valuation of your property and will offer free legal fees as part of the deal. (a potential saving of +-£1000 in fees).
Family Guarantee Mortgage
- Available up to 100% of the purchase price
- Guarantors provide a guarantee secured against their own residential property therefore requiring no cash in the form of a deposit.
- Maximum guarantee period is 10 years which means at the end of this period the charge against the property is released.
- This structure is perfect for first or second time buyers who don’t have a big enough deposit but who have a parent or grandparent who is able and willing to provide a guarantee secured against their residential property.
- All lenders will accept a family gifted deposit although the terms and conditions surrounding the gift may change from lender to lender.
- In the majority of cases a letter will need to be provided confirming that the gift is a gift (and not a loan) and that the parents have no recourse to the gifted amount and no charge on the property.
- Most lenders will accept an unlimited gift from the parents without the need for the applicants to provide any of their own funds for deposit purposes. There are a few lenders who will require a 5% deposit to come from the applicants own funds.