Guarantor mortgages: the risks and benefits

September 22, 2021 Icon 6 mins read
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Guarantor mortgages are home loans where a person accepts some of the risk on behalf of the borrower by acting as their guarantor. They can be useful for first-time buyers, but they are not without their problems.

How can a guarantor mortgage be useful?

A guarantor mortgage can be useful if you’re a first-time buyer. This is especially true if you have a lower income, are struggling to save for a deposit, have a bad credit score, or no credit history.

They involve the lender asking someone to “guarantee” that you can pay your mortgage back regularly. Lenders will therefore be less harsh in their risk assessment.

This person is called a “guarantor”.

Due to the risks involved, your guarantor must be someone who owns their own home, has a reputable credit score, and who has sought legal advice so they know the risks.

For obvious reasons, you need to have a trusting relationship with your guarantor. Generally, the lender will require them to be a close family member, like a parent or guardian.

What happens if I miss a payment on a guarantor mortgage?

The consequences hit both you and the guarantor quite hard. The lender will repossess and sell your home. Any money they don’t get back from the sale will be made up from whatever assets your guarantor has forfeited. This means they could lose enormous amounts of savings or even have their own home repossessed.

What types of guarantor mortgage are available?

Property as security

The guarantor promises the lender their home as security. The guarantor needs to own their own home for this to work, of course. If the borrower fails to make mortgage repayments, then it is possible that the guarantor may lose their home. This means the guarantor must be able to support the borrower in times of hardship, should they arise.

Savings as security

The guarantor promises the lender their savings as security. The guarantor puts a certain amount of savings into a special savings account held with the lender. They are able to make interest on these savings, though not as much as if they put their savings into an account with their bank or a credit union.

If the borrower fails to make their mortgage repayments, the lender can take a chunk out of the guarantor’s savings.

Are there alternatives to guarantor mortgages?

Joint mortgages

A parent and a child buy a house together, which means they are both responsible for mortgage repayments, and both own the house. This means that the parent can pay into the mortgage as well as the child, taking some stress off of the child.

However, bear in mind that this means that any failure to make repayments could be disastrous to both parties’ credit histories. Additionally, if the parent owns their own home, they will need to pay full stamp duty on the title deed, which will cost a lot of money.

Joint borrower sole proprietor mortgages

Joint borrower sole proprietor mortgages, or JBSP mortgages, are similar to joint mortgages. However, in this case, only the child has the title deed to the property, even if the parent is making repayments on the mortgage. This means the parent can avoid having to pay stamp duty, as the house is not legally theirs.

Nevertheless, being accepted for a JBSP mortgage is contingent on factors like the age of the parent and the likelihood of the child’s average income improving over the lifetime of the mortgage.

In both cases, joint mortgages always require a deposit, meaning that the parent is a borrower, not a guarantor.

95% mortgage guarantee scheme

In March 2021, the Chancellor of the Exchequer announced that the Government would start guaranteeing 95% mortgages for people with 5% deposits.

This means, in effect, that for a limited time borrowers can ask the Government itself to act as a guarantor on specific mortgage products offered by certain lenders. If you fail to meet your payments and your home is repossessed, the Government has promised to compensate lenders for any losses.

Bear in mind that interest rates for 95% mortgages are likely to be high, so you will likely need to be sure you can keep up with the rates. Talk to a professional financial advisor if you’re unsure.

The scheme is open to first-time buyers. It will end on 31st of December 2022.

FAQs

What happens if my guarantor dies?

Depending on the lender, you may have to get another guarantor. Other lenders may let you sell off your guarantor’s estate to go towards the mortgage. Assuming, of course, that it is bequeathed to you. Be sure to check before you borrow.

How much can I borrow?

Most guarantor mortgages are 100% mortgages, meaning you don’t have to put down a deposit. Instead, how much you can borrow is calculated based on how much your guarantor’s assets can secure. Some guarantor mortgages do require deposits however. The lender will calculate how much you can borrow based on whatever you can put down plus whatever your guarantor’s assets can secure.

Can I take out a guarantor mortgage with bad credit?

Possibly, though this isn’t definite. You will be subject to heavy scrutiny by the lender. Your guarantor’s assets may help offset your bad credit. But that’s a big may. Sign up with Credibble to begin repairing your credit today.

Do guarantor mortgages have good interest rates?

Often, a guarantor mortgage will have higher interest rate than a more typical mortgage. A guarantor mortgage may make it easier to be accepted for a mortgage, but you still need to be sure you can make repayments.

Can I take out a guarantor mortgage even if neither of my parents still work?

This is certainly possible, given that guarantor mortgages are secured using savings and property, not income. Check with your lender to see what their policy is.

Should I take out a guarantor mortgage?

If there’s one thing you take away from this article, it’s this: seek professional financial advice before you jump into anything as big as a mortgage!

What we will say is this: Guarantor mortgages can put a heavy financial burden on you and your guarantor, and that can lead to stress. Money problems of all sorts have the potential to break up families. You and your guarantor need to think very carefully before you make up your mind about what’s right for you.

Bottom line: Always seek professional advice before you make an important financial decision.

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Robert Edwards

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