A guarantor mortgage is far less common than the more traditional types of mortgage.
However, it is still a viable option for a some UK homeowners.
Read on to find out what is a guarantor mortgage is, when it’s useful, and more.
What is a guarantor mortgage?
A guarantor mortgage makes it possible for you to get a mortgage without a deposit or a good credit score.
In this instance, a guarantor agrees to take responsibility for any repayments which you cannot pay. They are legally responsible for repayments.
If you keep making your mortgage repayments, then the guarantor doesn’t have to do anything. It is only if you fail to meet your repayments that the guarantor will need to get involved.
What are guarantor mortgage’s secured against?
In a guarantor mortgage, the loan will be secured against something which belongs to the guarantor.
In most cases, this is either some of their savings, of a property which they own themselves. This gives protection to the lender that they will get their money back if the borrower defaults.
When your mortgage is secured against a house, the guarantor will put their own property up as collateral.
On the other hand, if the mortgage is secured against their savings, then the guarantor will deposit a sum into a savings account held by the lender.
Who can be a guarantor?
In the vast majority of cases, a guarantor is a close family member.
This is because becoming a guarantor involves taking on a significant personal risk. If the person you are doing it for is unreliable and doesn’t make their payments, it will affect you financially.
There are a few requirements you must meet in order to be a guarantor. These include:
- You must be at least 21 years old
- You must either own your property outright or have a high level of equity in your property
- You must have a strong credit score
- You must have a high-enough income that you can cover the cost of repayments, if necessary.
In most cases, someone who agrees to be a guarantor is a relatively high net worth individual – at least in comparison to the value of the house being bought.
They will meet all the criteria above, and will go through all the steps required by the lending to verify that they are willing to be a guarantor.
Why would you need a guarantor mortgage?
Guarantor mortgages are particularly common in the UK for first time buyers who cannot afford to get onto the property ladder without help.
In this instance, the person’s Mum and/or Dad (or another close family member) may agree to help them out financially. That is where a Guarantor Mortgage comes in.
An individual may not only be struggling to raise the funds for a deposit on a property. They could also be unable to meet the credit score requirements.
In this case, finding a guarantor who can take care of these things enables the individual to still purchase the property.
Things to consider when getting a guarantor mortgage
When you opt for a guarantor mortgage, and find a guarantor who is willing to support you, it is important to consider the position you are putting them in.
They have either put their savings or their house up as collateral, and therefore, you have a duty to make all your repayments and make sure they don’t regret their decision.
On the guarantor’s side, it is important to get independent financial and mortgage advice before jumping into this sort of decision.
Alternatives to guarantor mortgages
There are several government-led home buying schemes, including help to buy schemes.
Another alternative is a joint borrower sole proprietor mortgage, where two (or more) people are jointly responsible for a mortgage, but only one person owns the property.
