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Guarantor Mortgages: Are They the Solution You Need?
Buying a home is a dream for many. However, securing a loan can be tough, especially if you don’t have a big deposit or a perfect credit score. Luckily, a few types of mortgages can help you make this dream more achievable, and a guarantor mortgage is one of the best options.
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Guarantor Mortgages
As the name suggests, guarantor mortgages involve having a third party who promises to cover your mortgage payments if you can’t. This feature allows you to get a bigger loan or a better interest rate. Consequently, it can make the process of buying a home easier for you.
In the following guide, we’ll explain everything you need to know about guarantor mortgages. We’ll also cover how they work and who can get one, among other details. So, stick around.
What Is a Guarantor Mortgage?
A guarantor mortgage is a great choice for those who don’t qualify for a home loan on their own. Also known as a family-assisted mortgage, it’s a type of mortgage deal where another person agrees to take the risk of covering the payments if the homeowner falls behind.
In general, this person, or “guarantor,” is usually a family member or a close friend of the applicant.
Principally, guarantors in these deals won’t be named on the contract or own a share of the house. However, they do become legally liable in case the borrower can’t make repayments on time.
In general, guarantor mortgages provide the lender with an extra layer of security. As such, they help borrowers get a larger loan or a better interest rate than they normally would.
Overall, guarantor mortgages are often used for:
- New Mortgage: Helping first-time buyers enter the property market by boosting their affordability.
- Remortgaging: Assisting homeowners who want to do some refinancing to secure better mortgage terms or release equity.
- Change of Borrower: Facilitating mortgage applications where the primary borrower’s financial profile may not meet traditional lending criteria.
How Do Guarantor Mortgages Work?
Typically, a guarantor mortgage works just like any ordinary mortgage. As long as you make mortgage repayments on time, the guarantor doesn’t have to get involved in any kind of financial commitment.
However, if you cease to pay your mortgage and default on the loan, the guarantor has a legal obligation to cover the payments on your behalf.
In a standard mortgage, the loan is usually secured against the property you’re buying. So, if you fall short on payments, the lender can take legal action to repossess and sell the property to recover their money.
In the case of guarantor mortgages, the loan is secured against something that belongs to the guarantor. It’s like a guarantee, reassuring the lender that they can recover their money, one way or another.
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What Are the Benefits of Guarantor Mortgages?
In many cases, a guarantor mortgage can be a lifesaver. As long as the borrower and guarantor are on good terms, this type of mortgage can offer many benefits, including:
- Easier access to homeownership, especially for first-time buyers who are just starting a family.
- Lower deposit requirements (sometimes no deposit at all).
- Better interest rates, with the added security of a guarantor, make the mortgage more affordable.
- Greater access to larger loan amounts, enabling borrowers to purchase more expensive properties than they could on their own.
Types of Guarantor Mortgages
Guarantor mortgages come in many forms, each is more suitable for certain circumstances than others. Here are four of the options you may face when looking into this type of mortgage:
1. Savings As Security
Guarantors in this type of mortgage use their savings as security. This means they deposit a certain amount of money (5% to 20% of the property’s value) into a special savings account linked to the mortgage.
If the borrower fails to make repayments, the lender can access these savings to cover missed payments.
Such an option is ideal when the guarantor has sufficient savings to meet the lender’s security requirements. It also gives the guarantor a chance to offer help without transferring money or assets directly.
2. Property As Security
Here, guarantors use their own properties as security. In other words, this house or any other property is put up as collateral for the mortgage. If the borrower defaults on the mortgage, the guarantor could lose the property for good.
This option is best for when your guarantor doesn’t have enough savings to cover security requirements but owns a valuable property.
3. Family Offset Mortgage
A family offset mortgage also allows the guarantor to deposit money into a savings account linked to the mortgage.
However, unlike the “savings as security” type, the money isn’t used to cover missed payments. It doesn’t generate interest either. Instead, it offsets the mortgage balance, allowing the borrower to get a lower interest rate.
4. Joint Borrower Sole Proprietor Mortgage (JBSP)
This type involves more than one borrower sharing responsibility for mortgage repayments. Yet, only one person will retain ownership of the property.
Unlike other guarantor mortgages, where savings or property can be used as security, JBSP mortgages still require a deposit.
Who Can Become a Guarantor for a Mortgage?
A mortgage guarantor can be your father, mother, grandparent, or any close family member. A few lenders even accept a close friend as a guarantor. As long as they have a stable financial situation, they can support your mortgage.
That said, most lenders have strict criteria for who qualifies for this position. Take a look at some of the main requirements:
- Assets: The majority of the time, guarantors have to be homeowners themselves. This provides the lender with additional security, knowing that the guarantor has decent assets.
- Credit History: Having a good credit score is a must for a person to become a guarantor. Lenders will check their financial status to ensure they’re able to take on such a responsibility.
- Income: Guarantors need to have a stable and sufficient income to cover the mortgage payments if the borrower defaults.
- Age: Many lenders impose a maximum age limit for a guarantor. Typically, a guarantor needs to be under the age of 75 when the mortgage term ends. This means that for a 25-year mortgage, the guarantor should ideally be under 50 at the time of application.
- Whereabouts: The guarantor must be living in the UK and have their income deposited in sterling into a bank account.
- Proof of Legal Advice: Lenders require guarantors to fully understand the risks involved. To ensure this, they usually ask for proof that the guarantor has received specialist legal advice from a solicitor before applying.
Who Is a Guarantor Mortgage Best For?
A guarantor mortgage can be a fantastic choice in many situations. Here are a few cases where it’s best to go for this type of mortgage:
- First-Time Buyers: They usually lack sufficient funds for a deposit. Moreover, it’s nearly impossible to secure a mortgage without paying at least 5% of the property’s value. So, a guarantor becomes essential in this scenario.
- Young Adults and Students: Those with low income may struggle to secure a loan, as it’s mostly based on their gross annual earnings. Without a guarantor’s backing, a mortgage isn’t an option.
- Low Credit Score: Securing a mortgage with no (or even a low) credit score can be challenging. Thus, it might be easier for them to secure a mortgage with a guarantor’s assurance.
- Aspiring Homeowners: You may want to buy a property that costs more than you can afford. Without proof of future earnings or a huge deposit, getting a mortgage may be tricky. In this case, a guarantor can bridge the gap and provide assurance to the lender.
- Self-Employed Workers: People with irregular incomes sometimes face difficulties proving their affordability to lenders. This is when a guarantor mortgage becomes a viable option.
- Parents Supporting Their Children: Parents willing to assist their children in buying a home can become perfect guarantors for their mortgages. That’s especially beneficial when the children have limited financial resources.
Guarantor Mortgages FAQs
Can someone with a mortgage become a guarantor?
Yes, someone with a mortgage can become a guarantor for another mortgage. It shouldn’t be a problem as long as they meet the lender’s criteria, which involve having a good credit history, stable income, and sufficient equity in their property.
What Are the Downsides of Guarantor Mortgages?
Every mortgage type comes with its risks. Before you search for a guarantor or volunteer to become a guarantor yourself, it’s essential to understand the whole situation.
Here are a few of the risks you need to pay attention to:
- Damage to Credit Score: When you’re a guarantor, you become legally responsible for covering the mortgage payments. This means your credit score can be affected if the borrower defaults.
- Risk of Losing Assets: As a guarantor, your property or savings used as security can become at risk if the borrower fails to make payments. Eventually, you could potentially lose these assets.
- Strained Relationships: Financial commitments of this nature can put substantial stress on personal relationships between the borrower and the guarantor.
- Limited Access to Your Money: If you put your savings as security in a guarantor mortgage, you’re basically locking your money away for a long time. This means you can’t use it, in any case, until the borrower pays off most of the mortgage.
- Unexpected Circumstances: A guarantor mortgage can be a huge risk if the borrower suddenly loses their source of income. Even worse, the guarantor may need the extra cash for an emergency.
What happens if the guarantor dies?
A guarantor passing away isn’t a far-fetched possibility, given the length of most mortgages. In this case, you have a few options as a borrower:
- Find a new guarantor.
- Provide another form of security, such as additional savings or property.
- Remortgage without a guarantor (if you’ve already paid off a decent amount of your loan).
- Use your inheritance to pay the mortgage (if you’re a named beneficiary in the will).
Is it possible for the guarantor to withdraw from the mortgage deal before it’s completely paid off?
Yes, but it usually depends on the lender’s policies and terms. In most cases, the lender must approve and will usually require the borrower to find another guarantor. The borrower can also refinance the mortgage without a guarantor if their financial situation has improved.
Final Thoughts
In conclusion, there’s no doubt that guarantor mortgages make a perfect solution for those who face challenges securing a traditional home loan. In general, having a guarantor allows borrowers to purchase their dream homes with less upfront money and better terms.
That said, it’s essential for both the borrower and guarantor to understand the risks involved. That’s why getting professional advice is always a good idea.
Overall, if all parties make informed decisions, the process should go as smoothly as possible.
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