A guarantor mortgage is a home loan; however, a guarantor’s presence distinguishes it from a typical mortgage.
When moving home, mortgages are taken out to buy a property. When you buy mortgages, you are essentially borrowing money from a bank or building society to invest in buying a home, and in exchange, you pay interest on the loan.
The guarantor is often someone close to the property buyer, usually a family member such as a parent or a close acquaintance, that provides security against the home loan.
A guarantor also becomes liable to pay the remaining mortgage payments if the original buyer defaults or fails to make a payment on the property.
Guarantor mortgages are more likely to be approved by the lender because of the added security of assured repayments.
Before submitting your mortgage application, you need to ensure that you’re aware of what type of guarantor mortgage you want to apply for and who you would like as your guarantor.
If you want to know about all the different documents you require for a mortgage application, check out our easy to understand guide on mortgage documents below.
What’s included in this article:
- Definition of a guarantor mortgage
- Should you consider getting a guarantor mortgage?
- What are guarantor securities?
- Who can you choose to be a guarantor?
- What happens if you default on mortgage payments?
- What are the different types of guarantor mortgages?
- What do you do if your guarantor dies?
- How much does a guarantor cost?
- How much can you borrow with a guarantor mortgage?
- Disadvantages of a guarantor mortgage
Definition of a Guarantor Mortgage
A guarantor mortgage is a way of obtaining a mortgage when you do not have a deposit, or your financial circumstances discourage lenders.
A guarantor will legally agree to honour your mortgage payments if you fail to do so, but they will not own the property and will not be on the deeds.
Should You Consider Getting a Guarantor Mortgage?
There are several reasons why you may look into getting a guarantor mortgage. Firstly, some guarantor mortgages can cover 100% of the property valued, so if you are buying your first home, just getting on the property ladder and don’t have a deposit this can be helpful.
This means that you do not have to fret over arranging for a sizable deposit despite having a mortgage. Secondly, a guarantor mortgage may be a good option for you if you have a low income as mortgage lenders take the borrower’s income into account before deciding the value of the loan.
Since a guarantor places their property or savings as collateral, the value of the loan, you can receive increases. This allows you to explore options with more freedom.
Having a good credit history is among the most critical factors that influence the approval of mortgages.
If you are a first-time buyer, you should try and improve your credit score, but if you have a low credit score, having a guarantor with a good credit history will substantially increase your chances of obtaining the mortgage.
What are Guarantor Securities?
The guarantor provides security against the mortgage by either pledging their own property as collateral or storing their savings in special savings account as security. In the situation of both the buyer and the guarantor failing to make the mortgage payments, the mortgage lender repossesses the security provided by the guarantor.
Who can you Choose to be a Guarantor?
Different mortgage lenders have different requirements for guarantors, but some prerequisites remain the same. Firstly, the guarantor should be over the age of 21.
Choosing a parent or older relative to be a guarantor may be a good idea for several reasons. One of these is because they are more likely to have a better credit history and a higher credit score. Both of these are necessary for taking out a mortgage.
Along with having a good credit history, the guarantor must own a house preferably with at least 30% equity. This means that even if the guarantor is paying a mortgage on their own property, they must own 30% of the house.
Different mortgage providers may set a higher limit to this equity. If a guarantor is paying their own mortgage, the evidence of an income high enough to support also being a guarantor must be provided to your mortgage lender.
This will ensure that if you default on your mortgage payments, your guarantor will be able to afford the repayments.
If the guarantor you choose is retired or is no longer working, they would still have to provide evidence of enough financial means to support being a guarantor. This evidence can be in the form of property, assets, or savings.
What Happens if you Default on Mortgage Payments?
If you fail to make monthly payments, the mortgage lender has several options. Most of these are found in detail in the terms and conditions section in the mortgage deed.
The lender could allow you more time to catch-up with the missing payments or charge a fee on every payment you have missed.
The lender could also reach out to your guarantor to ask them to make the missing payments on your behalf.
However, if repayments on your mortgage build-up, the lender may take drastic measures. It first seizes or repossesses your property and then sells it.
If the property’s value is enough to cover your missed mortgage payments, the guarantor will not have to pay anything.
However, if there is still a difference that needs to be met, the guarantor will be required to settle it from the savings or property they have used to guarantee the mortgage. If the guarantor fails to pay the mortgage payments or does not contribute significantly to settle the difference, the mortgage lender seizes the guarantor’s property or savings.
What are the Different Types of Guarantor Mortgage?
Savings as Security
In this first type of guarantor mortgage, guarantor’s savings are stored in a special account as security. The most common value of the savings to be held is five to 20 per cent of the total house price.
As an incentive to the guarantor for saving money in this account, they earn interest on it. However, the interest rate is far lower than a usual savings account. In case of failed payments, the mortgage lender utilizes these savings to pay the instalment due.
Property as Security
The second type of guarantor mortgage includes the guarantor keeping his or her property as collateral.
This basically means that if you fail to make payments to the mortgage lender and the value of what you owe increases, the guarantor could risk losing their property. The difference between what you have repaid an
d what you owe is recovered from the property’s value kept as security by the guarantor. However, to keep a house as collateral, the guarantor must have substantial equity in the property. The percentage of this ownership may vary between different mortgage policies.
Family Offset Mortgage
Instead of depositing savings in a special account, the money is stored in an account connected to your mortgage. However, the guarantor does not earn interest on these savings.
Family Link Mortgage
This type of guarantor mortgage does not involve any deposits. Instead, savings of up to 10% of the value of the mortgaged property are stored in an account for a fixed period of three years.
In joint mortgages, parents can purchase a house and get a mortgage with their children. This implies that both the mortgage deed and the property deed contain the names of the parents and the child. This might not be a suitable type of mortgage for parents who already own a house as they would have to pay double the stamp duty charge.
The Joint Borrower Sole Proprietor Mortgage is similar to the joint mortgage because it also allows children and parents to purchase a house together.
Both names will also appear on the mortgage deed. However, unlike a joint mortgage, the property deed will only contain the child’s name. This will save the parent from paying the stamp duty surcharge.
Unlike other mortgage types, both joint and JBSP mortgages require deposits, so for individuals who want to go for slightly more pocket-friendly mortgages, it may not be an optimum choice.
What do you do if Your Guarantor Dies?
Every mortgage lender has a different policy regarding what happens when a guarantor dies. Some lenders may allow you to replace your guarantor and update the securities saved.
How Much Does a Guarantor Mortgage Cost?
How much you pay for a guarantor mortgage is linked to many factors. Most of the costs associated with a guarantor mortgage are the same as a standard mortgage. These include:
- Monthly payments to repay the total amount you owe along with interest.
- Mortgage fees.
- Valuation fees
- Paying the conveyancer you hire.
- Paying the mortgage advisor you seek help from.
How Much Can You Borrow with a Guarantor Mortgage?
The guarantor’s presence allows you to obtain a loan even with an unfavourable credit history and score.
Due to the property or savings that the guarantor puts up as collateral for the loan you take, you may even obtain up to 100 per cent of the property’s worth.
In this case, you would be free from paying a deposit. However, other types of guarantor mortgage require a deposit of five per cent of the property value.
Disadvantages of A Guarantor Mortgage
Taking a guarantor mortgage may sound like a very feasible option for you when planning to buy your own house.
You get a sizable loan regardless of your own credit history or your income. However, the guarantor you pick may not always feel so enthusiastic about this mortgage.
As the guarantor, there are certain risks that need to be kept in mind. Some of the impacts of this type of mortgage on a guarantor include the following:
The Guarantor Must Pay off the Debt if you Default
Perhaps the most significant risk factor that accompanies being a guarantor is being liable to make the loan’s monthly repayment if you default.
In the worst-case scenario, this includes the possibility of losing everything that the guarantor has kept as collateral.
So, by appointing a guarantor, you are not the only person to suffer in the face of failure to pay back the loan. Instead, the guarantor becomes equally liable.
Future Mortgages of The Guarantor are Influenced
A guarantor’s ability to obtain a loan is heavily influenced by prior responsibilities. Since finances are the most significant factor in determining a loan’s eligibility criteria, lenders may doubt whether a guarantor has resources to afford another loan.
Only after extensive documentation and rigorous checks confirming the financial well-being is another loan granted to a guarantor.
Risking a Good Credit Report
When a guarantor agrees to make the monthly repayment if you fail to, that loan becomes a part of the guarantor’s credit history as well.
In the situation of payments not being made, the guarantor risks the default appearing on their credit report. This, consequently, may reduce their chances of securing any type of significant loan in the future.
The Relationship You and Your Guarantor Share
Being a guarantor has more to it than just making payments on your behalf. When you choose a guarantor, you choose someone close to you that you trust will be prepared to take on your financial burdens if necessary.
Not only does a guarantor allow you to obtain a mortgage on your house and help you make payments, but they also risk losing their property and savings should you default. With so much risk involved, the relationship that you share with your guarantor is essential due to the possible impact.