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Guarantor mortgages
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What is a guarantor mortgage?
A guarantor mortgage is where another person acts as a guarantor by allowing their home or savings to be used as collateral for the loan. If the borrower runs into problems, the lender can ask the guarantor to make up any shortfall in repayments.
Guarantor mortgages are designed for those who do not meet the lending criteria for a standard mortgage. Depending on the lender, you may be able to borrow up to 100% of the property’s value with a guarantor mortgage, which means they can be useful if you don’t have a deposit saved up.
How do guarantor mortgages work?
A guarantor mortgage works in a similar way to a standard mortgage, provided you keep up with your monthly repayments. Where it differs is that if you are unable to meet your repayments, a close friend or relative agrees to step in to cover them. Although it’s the named borrower who owns the property, you are both legally responsible for the debt.
The guarantor’s own home is often used as collateral and may be repossessed in extreme cases. However, some mortgages are secured against savings, which means the guarantor agrees to deposit a sum of money into an account held by the lender. The deposited sum usually earns interest. Your guarantor gets this money back once you have repaid a certain amount of the loan. If you miss any repayments, however, the lender can use the cash deposit to make up the shortfall.
If no repayments are missed, nothing will be required of the guarantor. It’s only if things go wrong that the lender will expect both you and the guarantor to put things right.
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Who are guarantor mortgages suitable for?
Guarantor mortgages are suitable for borrowers who:
have either a small or no deposit
are on a low income
have a poor credit history
If a lender isn’t 100% confident about granting them a standard mortgage, having a guarantor on board can be the clincher.
Lenders will still carry out affordability checks on the borrower and won’t agree to a mortgage if they think the borrower will struggle. A guarantor will also be credit checked to ensure that they are a responsible borrower.
Who can be a guarantor?
Banks and building societies usually expect a guarantor to be a close family member of the borrower or someone with whom they have a close relationship. Typically, borrowers use parents as their guarantors, but guarantor mortgages aren’t limited to parents.
Guarantors usually need to be homeowners in their own right. Some lenders may expect them to have paid off their own mortgage in full, although most are less strict about this. Before going ahead, potential guarantors should take independent legal advice to make sure it’s right for them - some lenders will want to see proof of this.
Will I be able to borrow more with a guarantor mortgage?
A guarantor mortgage can let you borrow more than with a standard mortgage as you can borrow up to 100% of the property’s value rather than just 95% - generally the maximum allowed by mortgage deals you take out without a guarantor. You may also be able to get a bigger loan than the lender would otherwise think you can afford.
Are guarantor mortgages more expensive?
Guarantor mortgages generally come with higher interest rates than standard mortgages, especially if they let you borrow up to 100% of the property’s value, as they are riskier for the lender. This means your monthly payments will be higher than if you had taken out a mortgage for the same amount without a guarantor, so you’ll need to make sure you can afford them.
What are the risks of a guarantor mortgage?
A guarantor mortgage could have a significant impact on both you and your guarantor. Your guarantor should get independent legal advice from a different solicitor to the one you’re using to buy the property so that they fully understand the implications. It’s also a good idea to speak to a mortgage broker to make sure you’re getting the best deal for your circumstances.
Damage to credit score
Your guarantor’s credit score could be damaged if you default on the mortgage. This is more likely to happen if taking on the loan has stretched you financially, but could also happen if you suddenly lose your job or your situation changes. This could make it more difficult for your guarantor to get credit, such as a personal loan or credit card, in the future.
No access to money
If your guarantor has had to use their savings as security for the loan, they won’t be able to access that money for a period of time, and they won’t always earn interest on it. They could also lose money if you default on the mortgage, and their savings are used to make up the shortfall.
Risk to property
With some guarantor mortgages, a legal charge is placed on a portion of the equity in the guarantor’s home to act as security. This means that if the borrower defaults and the sale of their home fails to raise enough to pay off the mortgage, the guarantor will be responsible for making up the shortfall and could ultimately lose their home.
Risk to relationships
If the worst were to happen and you defaulted on the loan, resulting in your guarantor losing money or even their home, this could put a strain on your relationship. This is why it’s essential for the guarantor to get legal advice before going ahead and for everyone involved to discuss the implications beforehand.
Alternatives to guarantor mortgages
If parents, grandparents or other members of your family are unable to help you get on the property ladder by buying you a home outright, which isn’t possible for most families, there are other ways that families can help.
Two options are outlined below, but there are also joint borrower sole proprietor mortgages, where two or more parties take out a mortgage together, but only one is the legal owner.
Gifted cash deposits
If you can afford it, gifting some or all of the amount a first-time buyer needs for a deposit is perhaps the simplest way to help them buy a home. Just make sure you follow the correct procedure by reading our guide to gifted deposits.
However, if the would-be first-time buyer has a low income or a poor credit score, simply having a deposit won't be enough for them to get a mortgage.
Family offset mortgages
A family offset mortgage can help to make a first-timer buyer's mortgage repayments more affordable and doesn’t require a family member to donate money directly.
By depositing money into an account linked to the borrower's mortgage, a family member's savings can be offset against the mortgage, which means the borrower pays interest on less of the capital. The borrower will still need a deposit and be able to take out the mortgage in their own right.
Guarantor mortgages FAQs
Can I get a guarantor mortgage for a buy-to-let property?
Lenders won’t usually give you a guarantor mortgage for a buy-to-let property. But whether and how much they will lend to you is worked out differently with buy-to-let, so it may be easier to take out a buy-to-let mortgage without help.
Buy-to-let mortgages are usually taken out on an interest-only basis, so the repayments are lower than for residential mortgages, which would usually be on a repayment basis. Lenders also look at how much rental income you're likely to get for the property when deciding how much to lend you.
Is a guarantor on the mortgage forever?
No, but the guarantor will remain linked to the mortgage until the homeowner has paid off a sizable proportion of the debt. This is usually based on a certain number of years of repayments or reaching a lower loan-to-value on the loan – but if the borrower has repayment difficulties in the meantime, this period can be extended by the lender.
Is a guarantor mortgage the same as a family boost mortgage?
There are several different forms of guarantor mortgage, each with a slightly different name and different conditions depending on the lender. Family springboard or family boost mortgages offer ways to help aspiring home buyers purchase a property using security from family members, either in the form of savings or property.
What are the interest rates on guarantor mortgages?
Interest rates on guarantor mortgages can be higher than for standard mortgages, particularly given that some guarantor mortgages are 100% mortgages. For this reason, it’s important to ensure that you can make the monthly repayments before taking out the mortgage. Rates currently range from around 2.75% to 4.25%. You also need to take fees into account to find out which deals are the cheapest overall.
Which lenders do guarantor mortgages?
Lenders that currently offer guarantor mortgages include Beverley, Buckinghamshire, Loughborough, Mansfield, and Tipton & Coseley building societies, as well as Nationwide and Barclays.
You can find out which lenders offer guarantor mortgages and check eligibility criteria using comparison sites or by speaking to a mortgage broker.
