What you Should Know About Guarantor Mortgages

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If you’re looking to get onto the property ladder in the UK, a guarantor mortgage can be a great choice, not only for children but for parents and carers too. 

In this guide, we’ll talk through what a guarantor mortgage is, the benefits of one and the risks associated with it too

What is a guarantor mortgage?

A guarantor mortgage is a type of mortgage that uses someone else's home as “security” that the lender can sell if neither the borrower or guarantor can keep up with the borrower's mortgage payments. 

This reduces the risk for the lender as it ensures they won’t be out of pocket even if the monthly mortgage repayments can’t be made. 

The person acting as the guarantor must agree to make repayments if the borrower can’t. They won’t actually be on the title deed of the property and they won’t own any share of it. 

Who can get a guarantor mortgage?

Guarantor mortgages are useful for people who:

  • Are struggling to save enough money for a deposit 

  • Have a low income job

  • Have little to no credit history 

  • Have a poor credit score 

Who can be a guarantor for a mortgage?

Oftentimes, people will ask older relatives to be a guarantor. This is usually because they have better credit scores and higher incomes, as well as a strong bond with the borrower. Some lenders may require you to have a family member as your guarantor.

However, not everyone can be a guarantor. Many lenders require the guarantor to have fully paid off their own mortgage, while others will settle for a certain amount of equity. Either way, they must be a homeowner. If they are still paying their mortgage off, the guarantor will need to prove that they have a high enough income to cover your repayments as well as their own. 

If your guarantor is retired and no longer pays a mortgage, they may have to show that they have the funds in place to cover payments if necessary.

How much does a guarantor need to earn to be on a mortgage?

There is no set amount to how much a guarantor needs to earn; lenders will only ask for proof of income, savings and assets before making their decision. 

Despite this, having a guarantor with a good income does help, and in some cases, those who are looking to purchase a home can borrow more money by adding a guarantor with good income to their mortgage.  

How does a guarantor mortgage work?

As we’ve mentioned, a guarantor mortgage works by a guarantor providing extra security on a mortgage by agreeing to cover any payments you miss as the borrower. 

If the guarantor can’t cover these payments, their assets, such as property, are used as collateral to repay any shortfall on your mortgage. The guarantor is not on any of the deeds, but they are on the legal documents to outline the collateral they offer as security.

Types of guarantor mortgage

There are four main types of guarantor mortgages. These are:

  • Savings as Security - With this type of mortgage, the guarantor deposits money into an account held by the bank, which earns interest. The guarantor will get these savings back unless any payments are missed. If this is the case, the lender will either hold the savings until they recover the money from you or sell your property and use the savings pot to cover any shortfall between the amount the property sells for and the loan value.

  • Property as Security- These mortgages use the guarantors property as security. If there is a shortfall after selling the borrowers property, the guarantor could lose their property.

  • Family Offset Mortgages- With this type of mortgage, the guarantor deposits money into a savings account linked to your mortgage. The amount in the savings offsets the amount of the loan you pay interest on. If you miss payments, the lender will recoup the money in the same way as a savings as a security mortgage.

  • Family Link Mortgage- This product gives you 90% of a property’s value as a mortgage, but the remaining 10% is also secured against the guarantors home. The borrower and the guarantor will have to repay the 10% within the first 5 years. If you default, the guarantor is responsible for the 10% by themselves. 

What are the benefits of a guarantor mortgage?

One of the biggest benefits of a guarantor mortgage is that they allow parents and carers to help their children to get onto the property ladder, without the need to gift them a deposit. 

Instead, they must use their savings or the equity on their own property as the security against any default in repayments on the loan.

This is ideal for parents who have significant cash savings or have paid off their mortgage and want to help their child without giving them money outright for the purchase. Any savings that are used as security will be returned to the guarantor once the arrangement is no longer needed. 

What are the risks of a guarantor mortgage?

While there are benefits to a guarantor mortgage, there are a number of risks too. 

These include:

  • If the borrower defaults on the loan, the guarantor is liable to meet all monthly repayments on the mortgage and the lender will seek payment from them.

  • If the guarantor has used their own home as security, then it could be at risk and may need to be sold to meet the repayments of the home.

  • If the guarantor has used their savings as a form of security, these savings could be lost if the borrow falls behind on repayments.

  • Being a guarantor could impact your own ability to borrow as potential lenders could use this as a liability when assessing your credit file. This is worth knowing if you are considering taking out a loan in the future.

As a borrower, you are open to the same risks associated with traditional mortgages.

How much can you borrow with a guarantor mortgage?

As with any kind of mortgage, how much you can borrow will depend on several factors and is very rarely a one size fits all answer. 

The maximum loan amount will be capped by most lenders at 4.5 times your guarantor's income, although in some cases you may be able to get 5 times or more depending on the lender. 

With the support of a guarantor, your chances of securing a higher income could be greater than if you were applying by yourself.

FAQs about Guarantor Mortgages

What happens if the guarantor is unable to make repayments?

If your guarantor is unable to make the repayments for you, then the lender can take further action against them to secure the money. This can come from savings or their own property depending on what type of guarantor mortgage you chose. 

Can a guarantor be retired?

Yes, a guarantor can be retired as long as they can prove they have the funds in place to make the repayments should you default on them. 

Can you get a guarantor mortgage for a buy-to-let property?

Yes, you can get a guarantor mortgage for a buy-to-let property. It will be assessed in the same way as the other guarantor mortgages and the guarantor must be able to meet the lenders criteria. 

What happens if a guarantor dies with a guarantor mortgage?

Oftentimes, this is up to the lender on how to proceed if your guarantor dies. 

In some cases, you will be required to find a new guarantor, in other cases you may be able to pay off some of the mortgage with your guarantor's estate. To ensure you won’t face difficulties if your guarantor dies, it’s important to check the lender's policy before making an application.