Guarantor mortgages

Opening the door to homeownership for individuals who might otherwise struggle to meet conventional lending criteria

Taking out a guarantor mortgage can provide borrowers with an alternative means of securing a home loan, especially when traditional options may not be viable. Fundamentally, a guarantor mortgage involves an individual – typically a parent or close relative – agreeing to take on some of the risk associated with the loan. This is usually done by offering their savings or property as security against the mortgage and committing to cover payments if the borrower defaults.

One distinct feature of guarantor mortgages is that the guarantor has no legal ownership of the property. Therefore, they aren’t listed on the title deeds and hold no financial stake in the house. Despite this, the primary benefit lies in the borrower’s ability to secure a larger mortgage or, in some cases, obtain 100% of the property’s value without needing a deposit.

Opening the door to homeownership

Guarantor mortgages can open the door to homeownership for individuals who might otherwise struggle to meet conventional lending criteria. This could range from low earners, who might need additional support to secure a larger loan, to those without savings for a deposit. By applying with a guarantor, borrowers can access deals that allow them to finance up to 100% of the property’s value. For context, traditional mortgage products often cap at 95% Loan-To-Value (LTV).

However, the risks for guarantors should not be overlooked. If the borrower fails to meet their repayment obligations, there can be serious repercussions. Guarantors may lose their savings or, in extreme cases, their home if it was used as security. Therefore, this arrangement carries a level of financial risk that requires careful consideration.

Who could benefit from a guarantor mortgage?

Guarantor mortgages can cater to diverse needs. Applicants with minimal or no deposit, poor credit scores, or little credit history might all find these mortgages a helpful option. For instance, individuals with low credit scores often face challenges securing loans under conventional terms. Similarly, even those without any credit history – due to never having borrowed money before – may find guarantor mortgages more attainable due to the added reassurance of a guarantor’s financial backing.

Some first-time buyers, in particular, may find guarantor mortgages appealing. Lenders consider the additional security from a guarantor, which can help first-time borrowers access the housing market with competitive options. However, it’s worth noting that not every lender uses the term “guarantor mortgage,” so some products with different names might fall under this category.

Different types of guarantor mortgages

Guarantor mortgages typically fall into two categories, linked either to savings or property. For savings-based guarantor mortgages, the guarantor places a portion of their savings – often 5%-20% of the property’s value – into a separate account connected to the mortgage. This cash is held for a specific duration or until the balance of the mortgage falls below a certain threshold. While the guarantor can earn interest on these savings, the interest rate may be lower than other savings accounts.

For property-based guarantor mortgages, a legal charge is placed against the guarantor’s home. For example, a lender might require 20% of the loan’s value to be secured against the guarantor’s property. Typically, the guarantor must have significant equity in their property, or it should be owned outright. This type might appeal to guarantors without sufficient savings but harbours considerable risk, as repossession of the guarantor’s home is possible if the borrower defaults.

What does it take to be a guarantor?

Becoming a guarantor involves meeting specific requirements. Guarantors generally need to have sufficient savings or property to offer as security. Depending on the mortgage, the guarantor may need to lock funds away for several years or utilise equity in their home. A strong credit rating is also essential, as it reassures lenders that the guarantor can handle their financial responsibilities.

Additionally, some lenders require guarantors to seek independent legal advice. This precaution ensures they fully understand the risks associated with guaranteeing a mortgage, including the potential loss of savings or property. Even if legal advice isn’t mandated, it’s highly advisable to safeguard the guarantor’s interests and clarify any uncertainties.

Realistic evaluation of affordability

For guarantors, the stakes are significant and should not be underestimated. The guarantor could face severe repercussions if the borrower encounters financial difficulties and misses payments. For savings-backed mortgages, the lender might extend the period during which savings remain inaccessible or, in worst-case scenarios, retain the funds permanently. Property-backed guarantees carry even greater risks, as lenders could repossess and sell the guarantor’s home to recover any shortfall.

Borrowers, too, must understand that having a guarantor doesn’t mean they can borrow limitless amounts. Lenders will still assess both the borrower’s and guarantor’s ability to meet monthly payments. While guarantor mortgages can provide access to larger loans, a realistic evaluation of affordability remains vital.

Securing the right advice

Guarantor mortgages can be a lifeline for those facing challenges in accessing traditional mortgage options. However, the potential risks to guarantors mean careful planning and expert advice are crucial. Lenders often have differing criteria for guarantor mortgages, so having someone knowledgeable to guide you through the process can make all the difference.