What's a guarantor mortgage?
- Do you want to get on the property ladder?
- Do you need some help getting a mortgage?
- Do you think your parents or close relatives could help you? - at no cost for them.
If that's the case a guarantor mortgage could be the way to go. This page will explain how..
What does a guarantor do?
What's defined as a 'guarantor' is someone who is willing to guarantee your mortgage repayments. A guarantor is usually a parent but can also be a close relative or a close friend.
A guarantor does not need to pay anything unless you can't make your repayments. If that happens they become liable to cover the payments instead of you.
Often mortgage lenders use income multiples to find out how much they can lend to you. With such mortgage providers, you can also use the guarantor's borrowing power. By using both incomes, you can get a bigger mortgage.
With assistance from a guarantor, getting a mortgage can becomes possible.
Is there a reason for getting a guarantor mortgage?
Getting a mortgage is difficult these days. This is due to a lot of different reasons:
- With the credit crunch, deposit free loans are not available anymore.
- Mortgage lenders do not lend as much as they used to and reject more applications than before.
- The low base rate is not evident in the deals offered to first-time buyers.
- Despite the lower house prices, the average house price is still very high for first-time buyers.
- Typical deposits are now 10% or even more .
One way to solve this problem is to ask a relative to lend some cash to pay for the mortgage deposit. If you use a guarantor mortgage, you won't have to do such a thing. Using the combined borrowing power (yours and your guarantor), mortgage providers can lend you more money. They are two advantages using a guarantor: you can afford a bigger mortgage, and you could be getting on the property ladder sooner.
Pros & Cons of guarantor mortgages
- The guarantor doesn't have to spend any cash
- It is possible to get a mortgage quicker
- You can get a bigger mortgage
- Your guarantor is exposed to a financial risk, if you cannot repay the mortgage.
- There is typically an age limit (60 years) so that your guarantor can qualify
- Your guarantor may be restricted from buying more properties
What are the risks if I get a guarantor mortgage?
Should you fail to make your monthly repayments, it becomes the responsibility of your guarantor to pay back the loan. The financial risk is transferred to your guarantor and if they fail to make your payments, they could potentially lose their home, especially when the guarantor is responsible for the whole mortgage.
As there are some risks involved, you have to be sure that you can make the monthly repayments. If you wish to go for a guarantor mortgage, make sure that your guarantor is fully aware of the risks involved, and advise them to seek legal advice. You may want to write a contract to explain what should happen if you cannot repay your loan. As you are in an important agreement with somebody close to you, it is vital that you plan ahead.
What is the benefit for the guarantor?
A guarantor mortgage can be a way for parents to help their children to get on the property ladder when they don't have money available for a deposit. Higher house prices result in higher deposits required . Instead of lending a sum of money, parents can choose to be a guarantor so that their child can buy a house.
Something else to consider is that being a guarantor has got tax benefits compared to joint ownership. A guarantor's contribution do not attract Capital Gains Tax, and is not considered to be an asset for the purposes of Inheritance Tax.
What are the limitations on being a guarantor?
Mortgage lenders typically impose an age limitation of sixty on the guarantor at the time of application. Most mortgage lenders apply this age limit in order to guarantee that there will not be changes in the guarantor's income level. This limit can in some cases be waived. When guaranteers go on retirement, the mortgage lenders are concerned about their ability to pay the loan should the guarantee fail to do so.
Guarantors are subject to a financial assessment just like the guarantee. A guarantor should have an high enough income to be able to make repayments . The guarantor's income isn't limited to salary and can also include things such as investments and pensions.
Plan ahead if you choose to be a guarantor, especially if you plan to buy a house in the future. Bear in mind that you are responsible for an additional mortgage. Mortgage providers might reject your application if you apply for an additional mortgage while being at the same time already financially committed as a guarantor.
Who is best suited for a guarantor mortgage?
Lenders are more likely to select buyers with defined career plan. So that you can become financially independent from your guarantor, you need to make sure that your income will go up in the next couple of years. If mortgage lenders are not convinced that it will happen, they are unlikely to accept your application for a guarantor mortgage.
A guarantor mortgage is the best option for someone who can almost pay for a deposit but would rather not wait anymore before getting on the property ladder. In addition to be able to make the repayments, you have to think how you will be able to take full responsibility for the repayments in the future.
Thinking of applying for a guarantor mortgage?
If you decide to apply for a guarantor mortgage, we would very strongly recommend that you talk to an independent adviser. The adviser will explain all the available deals and the conditions specific to each mortgage provider: the requirements for your guarantor, the amount they can lend etc.
We would advise you to you fill in the mortgage enquiry form on this site and a FSA-authorised independent adviser will give you a call back to answer all the questions you may have and give some information on guarantor mortgages.