Guarantor mortgages are an excellent option for many who would otherwise find it difficult to get on the housing ladder. For people with little or no deposit, low income or bad credit, a guarantor could make all the difference in a mortgage application.
Mortgages are assessed based on the level of risk. When a guarantor is involved, the risk to the lender is reduced significantly. That said, the risk instead falls squarely on the shoulders of the guarantor. That person acts as a ‘guarantee’ that a mortgage will be repaid. Still, by reducing the risk for the lender, a mortgage with a guarantor can open up some great deals for borrowers.
If you’ve had an uphill battle getting a mortgage, but have someone willing to be a guarantor, there may be some superb guarantor mortgage deals available to you. The risk is relatively high for both the borrower and the guarantor, so you must consider this decision very carefully. Speak to one of our expert advisers at Think Plutus or read on to learn more.
What is a guarantor mortgage?
A guarantor mortgage is guaranteed by a family member or a friend. The nature of this ‘guarantee’ is that if the borrower fails to make any mortgage repayments, the guarantor is legally obliged to step in and make the payments.
The guarantor’s own home or savings are usually the security for the mortgage. This means the guarantor’s assets can be used as collateral if the unpaid debt is not honoured. This means the risk is high because the guarantor’s own home could be forfeit if the mortgage payments are not covered. This is why these mortgage types are only approved following consultation with mortgage advisers and solicitors.
In some cases, a guarantor is liable for the full value of the mortgage, but there are also products where the guarantor is only liable for a partial amount.
Who can be a mortgage guarantor?
Although you can nominate a friend as a guarantor, most lenders will only offer a guarantor mortgage to applicants who nominate a family member as their guarantor. Generally speaking, it can be your parents, grandparents, siblings or stepfamily.
In most cases, lenders will insist the guarantor is a homeowner. However, there are lenders who will consider potential guarantors who offer savings as collateral. In these cases, the savings in question would be kept in a bank. The guarantor would be unable to access these funds until a specific portion of the mortgage is repaid. The guarantor’s savings can earn interest, but this depends on the terms of your chosen mortgage deal.
Will my guarantor own my property?
Your guarantor will not have any claim to your property. They will not be registered on any title deeds through the land registry. The guarantor arrangement is purely between the mortgage lender and the guarantor, and it is strictly financial.
A guarantor will need to have complete trust in the borrower(s) they provide a guarantee for. It is for this reason that lenders generally prefer immediate family members as guarantors. The guarantor will not have any ownership in your property, but they will be legally obliged to ensure all repayments are met.
100% guarantor mortgages
One of the key advantages of a guarantor mortgage is that the borrower will not need to put forward much money as a deposit. In fact, there are some lenders who will offer 100% mortgage deals to borrowers with a guarantor, meaning no deposit at all is needed.
This is helpful if you’ve not yet managed to save a deposit, but the rates may not be the most competitive. The best rates are usually offered to borrowers who can provide a deposit of at least 20-25%. Having said that, with a guarantor in place to take the risk away from the lender, it may still be possible to get a good deal. This largely depends on the security your guarantor provides – the value of their property or the amount of savings they have is key.
If your guarantor has savings that they would like to put forward as security, a family mortgage may be the best option. In these arrangements, the savings are moved into a dedicated account linked to your mortgage. Once the initial mortgage term comes to an end (usually no more than five years), the guarantor can withdraw their funds, sometimes with interest.
Guarantor mortgage because of low income
When a borrower’s income is too low for the mortgage amount they require, a guarantor mortgage can be a big help. When your income level is low, lenders may offer a reduced loan value or even decline your application. If you are determined to get a certain property, a reduced mortgage value simply won’t cut it.
A guarantor may help you secure a larger amount, as the lender might consider your guarantor’s income as well as your own. This is great for boosting the amount offered to you.
Guarantor mortgage with bad credit
If your credit file doesn’t make for great reading, a guarantor could be the difference between your mortgage application being declined and accepted. That said, it may still be possible to secure a mortgage without a guarantor, with the right help.
High street lenders frequently decline applicants who have bad credit. This is because they are very conventional, and prefer catering to borrowers whose circumstances are clear-cut and low-risk. There are, however, specialist lenders who regularly deal with adverse credit, and these are the ones to approach when your credit file has issues.
If the guarantor you nominate has bad credit, a guarantor mortgage may be a real challenge to secure. Individual circumstances differ, and if your guarantor has sufficient equity in their own property, or lots of savings/income, it may still be possible.
There’s no way to recommend the best route for you without speaking to you first. If you contact Think Plutus and speak to an adviser, we can assess your situation and give you some guidance on whether a guarantor will be necessary. Our team can also find the right lender and the best possible deals you would qualify for from the full mortgage market.
When can I have my guarantor removed?
Guarantors can be removed from your mortgage, but this depends on the terms of the product. You will find that you cannot remortgage without a guarantor unless you get consent from your current lender.
Your mortgage terms will tell you whether your guarantor can be removed from the mortgage. Typically, it will be dependent on a certain number of years passing or a specific portion of the mortgage being paid off. If you miss any payments, the amount of time before the guarantor can be removed may be extended.
If you intend to remove your guarantor from your mortgage, take the time up-front to familiarise yourself with the terms of your deal. This will tell you precisely how and when you will be able to remove the guarantor.
Guarantor for buy-to-let
It is not uncommon for guarantors to be a part of residential mortgage deals. However, it is extremely rare for a guarantor to be present in a buy-to-let mortgage, but that doesn’t mean no lenders will consider an application. This would be considered a niche mortgage type, so you’ll need the help of a specialist adviser who can speak with you in-depth about your circumstances.