With the average UK home now costing just over £250,000, and far fewer 90% mortgage deals than there once were, a typical first time buyer will need a deposit of around £50,000 to get a foot on the housing ladder. That’s why guarantor mortgages can offer an alternative option towards home ownership.
A guarantor mortgage is a mortgage designed for anyone who does not meet the lending criteria for a standard mortgage but who can get a third-party to act 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.
The guarantor’s own home can be at risk if the new borrower falls into arrears.
A guarantor mortgage allows someone who doesn’t have a deposit to buy a property with the help of a friend or relative who agrees to step in if the home’s owner fails to make the agreed repayments. Although it is the named borrower who owns the property, the guarantor is legally responsible for the debt.
The guarantor’s own home is often used as collateral, and may be repossessed in extreme cases. But sometimes the lender will accept a cash deposit from the guarantor instead. This is paid back – usually with interest – once the borrower has repaid a certain amount of the loan. If there is a default, however, the lender can use the cash deposit to make up any 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 the borrower and the guarantor to put things right.
Guarantor mortgages normally appeal to borrowers who have no deposits or just small ones, who are on a low income and/or who have a poor or non-existent credit record.
Lenders will still carry out affordability checks on the borrower and they shouldn’t agree to a mortgage if they think the borrower will struggle. But if the lender has a few doubts about the borrower’s long-term ability or simply doesn’t have quite enough information to be 100% confident about granting the loan, having a guarantor on board can be the clincher.
A guarantor will also be credit checked to ensure that they are a responsible borrower in the event that they have to make repayments on the borrower’s behalf.
Banks and building societies usually expect a guarantor to be a close member of the borrower’s family. Typically, borrowers take out parental guarantee mortgages although these are not strictly limited to parents.
All guarantors must be homeowners in their own right. Some lenders expect them to have paid off their own mortgages in full, although other lenders are less strict about this.
There’s no set amount a guarantor needs to earn. The lender will carry out a credit check on the guarantor and take their income into account, but usually the lending decision is taken based on the borrower’s and the guarantor’s combined means.
It’s the fact that the guarantor is putting up collateral – their own home or a cash lump sum – that is most important for the lender. For this reason, retirees who own their home outright can often act as guarantors.
Many lenders offer guarantor mortgages, but it tends to be more specialist lenders who offer the better rates.
If parents, grandparents or the whole family are unable to help by buying a house outright (which is the most direct way to help, but isn't really on the table for most families), there are a number of ways families can help first time buyers.
If you can afford it, gifting some or all of the amount a first time buyer needs to put down as a deposit is perhaps the simplest way to help them on to the housing ladder. 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 to get a mortgage.
A family deposit mortgage can help boost a first timer buyer's deposit without a family member donating the 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, making repayments more manageable. Typically, though, the borrower will need a deposit of at least 5% of their own.
There are instances where the borrower won't need to put down any deposit, but this should be approached with caution.
Once a sufficient period of time has elapsed, or enough of the mortgage has been repaid, the family member will then get their money returned in full, and often with interest. The downside is that this could take a lot of years.
If you're a parent thinking of helping your child buy their first home, there are a few steps you should consider before rushing in and offering financial help.
Obviously, the first thing to think about is your own financial situation. What are your resources? How much financial help can you give?
Then think how much help your child will need – are they in a position to own a home and maintain a mortgage? Talk to them candidly about their circumstances, if they'd like to own a home, and whether they want your help to buy one.
Maintaining a property requires commitment and financial security, it could be risky if they become caught in a situation of having to keep up mortgage repayments or other maintenance costs they can't afford.
It will save you a lot of potential stress and confusion if you are clear from the start about what you want to do to help your child and the terms of your financial help.
You should decide whether you are giving your help as a gift, an investment or a loan (and if you will charge interest), and make this clear to your child beforehand to avoid any confusion further down the line.
If you are gifting money this may also be subject to inheritance tax if you die within seven years.
Depending on how you raise the money to gift, you may also have to pay capital gains tax as this could be interpreted as ‘disposing’ of assets.
You hope that no dispute will ever reach a point of having to get lawyers involved, but drafting up some formal agreements with a solicitor beforehand can be a good idea, especially if you're treating your help with the house as a loan or investment.
On another legal note, if you want to make sure that the house cannot be sold without your permission, you can contact the Land Registry to ensure that the property is registered with a Restriction on Title.
Whether you have bought the entire house outright, helped with a deposit or acted as a mortgage guarantor, you should remember this is not your home and you shouldn't really make any rules about how your children are going to live there.
You would be well within your rights to ask them to respect your wishes regarding the property, but obviously using financial help as emotional leverage is likely to lead tensions within any relationship.