If you’re struggling to save a deposit, asking Mum, Dad, or maybe even Gran to be a guarantor for your mortgage, might just be the solution.
24% of prospective borrowers say they’re more reliant on help from the BoMaD as a result of the pandemic and although it may feel awkward asking for help, you might be surprised by your parent’s answer.
A guarantor mortgage could help you:
Get out of your parent’s place (away from arguments about recycling and onto the property ladder for you to incorrectly place pizza boxes in your own bin)
Move into a property with no deposit (ideal for those on low income or renters struggling to pay rent and save at the same time)
But what are the risks involved and how does this type of mortgage work for first-time buyers?
This guide answers these questions and more but as always, you can send your questions over to us via the online chat in the corner.
What is a guarantor mortgage?
A guarantor mortgage uses someone else’s savings or property as collateral for the loan.
When you take out a guarantor mortgage, your lender will require you to meet terms and conditions and by signing the contract you agree to pay your mortgage on time and in full.
If you fail to meet those obligations, your guarantor could face repaying your mortgage.
If for some reason, they too can no longer repay the outstanding mortgage repayments, both your home and their home could be at risk for repossession to settle your mortgage debt.
It’s only if things go wrong that the lender will expect both the borrower and the guarantor to put things right. If you keep up with your guarantor mortgage repayments, your guarantor won’t lose anything.
How does a guarantor mortgage work?
A guarantor mortgage can allow parents to help their child buy a home without the need to give them the money for a deposit.
If a loved one agrees to be a guarantor for your mortgage, they will be legally responsible for paying the mortgage repayments if you can’t, so all parties involved should take the time to understand the pros and cons of a guarantor mortgage before committing to the agreement.
There are different types of guarantor mortgages but some provide guarantors the option to place a portion of their savings into a savings account to accumulate interest until you, the borrower, have built up enough equity in your property through repaying your mortgage and they (the guarantor) are released from the agreement.
Some guarantor mortgages require the guarantor to hold a minimum sum in savings which could be up to 25% of the property’s market value, though the amount required will vary depending on the borrower’s circumstances and the value of the property.
What are the different types of guarantor mortgages?
There are different variations of guarantor mortgages but usually, the guarantor has to use their property or savings as security. This reduces the risk of loss to the mortgage lender as if you default on your loan, it’ll still be covered by your guarantor.
Have a read about the different types of guarantor mortgages below but always seek advice before deciding on which one to go for - after all, it could just save you some money!
Guarantor mortgages with property as security
When a parent or family member agrees to be a guarantor for your mortgage, they are agreeing for a charge to be placed against their property.
Your guarantor will usually need to own a substantial amount of equity in their property to be eligible to help you with a guarantor mortgage. That means they ideally need to have paid off most of their mortgage or all of their mortgage.
Guarantor mortgages with savings as security
Your parents might not feel comfortable using their home as security but they might be more willing to use a percentage of their savings instead.
Some lenders offer mortgages that let a guarantor deposit 5-20% of the property’s market value into a savings account. The money is held as security and builds interest over time but keep in mind that the amount of interest your guarantor could accumulate will depend on the lender and your ability to meet the eligibility requirements they have.
Over time as you repay your guarantor mortgage, the amount you owe will decrease and therefore the risk of greater loss to the lender decreases too.
Some agreements allow for the guarantor to be released from the contract when the borrower owes less than 80% of the property’s value but again, this number can vary, and some lenders require their borrowers to have paid off a larger portion of their loan.
Whole loan guarantor vs shortfall guarantor mortgages
Guarantor mortgages can be obtained under whole loan or shortfall agreements. If your guarantor agrees to cover the whole of your loan, they will need to prove they have sufficient equity in their property or sufficient savings to cover the entirety of your mortgage if you can no longer make the repayments.
For example, if you apply for a guarantor mortgage of £200,000 but based on your income and other factors, can only prove that you can afford £150,000, your guarantor would still need to have ample income to cover the whole £200,000.
A shortfall guarantor mortgage contract is less common. This type of agreement requires your guarantor to cover the surplus or remaining amount that you can’t afford.
So using the same above example, if you apply for a guarantor mortgage of £200,000 but based on your income and other factors, can only prove that you can afford £150,000, your guarantor would agree to cover the shortfall of £50,000.
How much deposit do I need for a guarantor mortgage?
If you’re currently renting or struggling to save but eager to buy your own place, it could be helpful to know that a guarantor mortgage doesn’t always require a deposit. That’s because most guarantor mortgages use the guarantor’s savings or property as security for the loan which can offset some risk to the lender.
100% mortgages won’t be available for every borrower because the criteria of some banks restrict lending if the borrower’s circumstances suggest that a future default is possible.
Bad credit, a low credit score, or an unpredictable income can all result in a lower loan-to-value ratio being offered on a mortgage, so you may still have to save a deposit.
Calculate your deposit for a guarantor mortgage
A good mortgage broker will quickly calculate whether you would need a deposit for a guarantor mortgage and if so, how much.
A really good mortgage broker will compare the market and present you with a broad range of options that have been shortlisted because of their suitability for you.
Taking the extra time to check your options could be the difference between an approval or rejection, so look at reviews and work with a broker you feel comfortable discussing your future and finances with.
Who are guarantor mortgages suitable for?
First-time buyers typically but guarantor mortgages can help lots of different people buy a home including those with:
Little to no credit history
Unpredictable or fluctuating income
A small or no deposit
Who can be a mortgage guarantor?
Lenders usually require a guarantor to be closely related to the borrower, a parent or grandparent can be a natural choice for many. A handful of guarantor mortgage lenders allow for spouses with separate bank accounts or relatives including aunts or uncles.
In the UK, guarantors need to be at least 21 years old and some lenders will have upper age limits too, but it will also depend on the guarantor’s circumstances.
They’ll need to have either substantial savings or a good chunk of equity in their own property too, as this is what will be used as security for your mortgage.
Do guarantors get credit checked?
Yes, this is a crucial stage of the mortgage application process. You may be aware that your credit score and history will affect your ability to get a mortgage but your guarantor, who will be responsible for repaying your mortgage if you can’t, will also need to be assessed.
Most lenders will want to see a strong credit score that indicates a history of careful borrowing and repaying and some may have minimum credit scores that they require the guarantor to meet.
You and your guarantor need to check your credit reports ahead of making an application for a mortgage, as this can highlight any issues that could prevent you from making a successful application.
Send your credit report to a trusted mortgage broker securely, so that you can get a professional opinion on what your next steps could be and who the best lenders are to approach.
Can I get a guarantor mortgage with bad credit?
Bad credit issues are more common than you think, so don’t be put off from seeking advice about getting a guarantor mortgage if you have debt or credit issues, as mortgage brokers help people with IVAs, bankruptcy, and CCJs all the time.
You might be charged a higher rate of interest but again, that will depend on your choice of lender and your own personal and financial circumstances.
Having bad credit can reduce your choice of lenders as some won’t accept severe or recent credit issues. Mortgage lending criteria vary massively between different lenders, so even if you think your credit score or debt is terrible, there may be a niche lender open to accepting you.
The good thing about guarantor mortgages is that by having a guarantor and either their property or savings as security, the risk of loss is reduced to the lender, and therefore in some circumstances, it can make finding a willing lender easier.
For example, you might earn a steady income of £25,000 a year but you have a low credit score because you’ve never taken out a loan or credit card. Some lenders may be cautious as they have no financial history to confirm you’re a trustworthy borrower, whereas another lender may be willing to lend to you in light of your predictable income.
Getting a guarantor mortgage after being rejected
Your circumstances as a whole will determine the outcome, so don’t panic if you’ve been rejected for a guarantor mortgage because of bad credit, low income, or errors on your application.
Ask a mortgage broker for their help as they’ll have access to a whole host of lenders right across the UK, including those that approve mortgages for first-time buyers with issues on their application.
Working with a qualified mortgage broker can help to reduce the chance of rejection because they’ll identify and try to resolve issues with you, before ever suggesting you make a formal application.
How much can I borrow for a guarantor mortgage?
Single guarantor mortgages
The amount you can borrow for a guarantor mortgage will be decided on a case-by-case basis but factors like your age, debt, and income can all affect your maximum mortgage amount.
Many lenders use income multiples to calculate how much they’re willing to lend a borrower. So for example, if you had an income of £20,000 a year, a lender could multiply this by 4.49 to determine you could borrow £89,800.
Some UK mortgage lenders use higher income multiples to calculate maximum mortgage amounts but these products have criteria that usually require a good credit score and a minimum income requirement.
Your chosen mortgage lender will only ever approve a loan amount that is affordable for you but having a guarantor can help to reduce the risk of loss to lenders and in some circumstances, their income on the application can help you to increase the amount you can borrow.
Joint guarantor mortgages
If you and your partner want to get a mortgage, both of your incomes may be used for the affordability assessment, meaning that you could borrow more money based on your two incomes.
While that may be enough to help you qualify for a larger loan to buy a home, you may still be struggling to meet the deposit requirements for a mortgage without a guarantor which can range between 5 - 25% depending on the lender.
That’s where a guarantor can help as their savings or property can be used as security, negating the need for you to save a large deposit. As mentioned previously, it could even help you get a mortgage with a zero deposit.
Every situation will be different because no two borrowers have the same financial or personal circumstances.
Ideally, you should talk to a qualified mortgage broker who can calculate how much you can borrow on a guarantor mortgage for you and your spouse and whether having a guarantor would be the most financially viable option for you both.
It’s a broker’s job to search the market for the best-matched mortgage product based on your circumstances and if they think a better product or route, like Shared Ownership, or a government-backed 95% mortgage could be better they’ll let you know.
Can I get a guarantor mortgage if I’m a first-time buyer?
Yes! In fact, some guarantor mortgage products stipulate that borrowers have to be first-time buyers (FTB) to be eligible for their products.
Guarantor mortgages can be a great way for a first-time buyer to purchase their first home as lenders may use the guarantor’s savings or property as security to offset the risk you potentially pose as a first-time buyer.
How much interest will I be charged for a guarantor mortgage?
The interest rate you’re charged for a mortgage as a FTB may be high depending on factors like your income, credit score, and job stability, but having a guarantor could help you to meet the eligibility criteria for mortgages with cheaper rates.
Compare the best rates for guarantor mortgages with a broker that has access to a range of lenders. It pays to look for the lowest rates as ultimately, a lower rate means you pay less for your mortgage overall.
Guarantor liability if you can't pay your mortgage
Defaulting on a guarantor mortgage with property as security
If you default on your mortgage, your home, and your guarantor’s home would both be at risk of being repossessed to cover the repayments.
That’s because there is no guarantee that your property will sell at a price high enough to cover the whole debt. House prices can go up or down over time depending on the economy, the local property market, and demand for specific types of buildings.
The thought of your home, let alone your guarantor’s home being at risk of being sold to cover mortgage debt isn’t exactly tempting but remember, repossessions occur as a last resort for lenders as it’s usually in their best interest to resolve arrears rather than face the expense and time of putting your property on the market.
Mortgage lenders also follow the Mortgage Conduct of Business (MCOB) rules set out by the Financial Conduct Authority (FCA), which means that they should not repossess your home unless all reasonable attempts to resolve the situation have failed.
Defaulting on a guarantor mortgage with savings as security
If you miss any mortgage repayments, the lender could hold on to your family member's savings for a longer period and in the worst-case scenario, your guarantor could lose their savings.
If the lender has made all reasonable attempts to resolve the arrears on your mortgage with you and has treated you fairly, they may resort to repossessing and selling your property.
However, if the sale retrieves less than what you still owed on your mortgage, they could recoup the difference from your guarantor’s savings.
What happens if my guarantor dies?
If your guarantor passes away, your lender may require you to find a new guarantor to cover the mortgage in the event that you default.
That being said, you could have hypothetically paid off a sizeable portion of your mortgage debt at this point and subsequently, by having more equity of your own, you could be eligible to remortgage to a deal without a guarantor.
Furthermore, you may also receive an inheritance from your guarantor and this could be used to pay some of your mortgage early, though it’s always wise to calculate any early repayment fees versus any savings made from overpaying a mortgage.
Can I get a guarantor mortgage if my parents are retired?
If your parents are retired, they may still be able to help out as guarantors for your mortgage, as the main considerations with most lenders will be the savings or property they can put forward as security against the loan.
The income they receive through a pension can also be considered when assessing the affordability of a guarantor, though this can vary between lenders.
Ultimately, it’s their ability to repay and settle the mortgage debt if you aren’t able to, that will determine whether a retired parent or grandparent can be a guarantor.
What are the potential risks involved with a guarantor mortgage?
You and your guarantor will probably never reach a dispute as you’ll pay your mortgage on time and in full but there’s always the chance that if for whatever reason you couldn’t pay your mortgage, your guarantor would be liable for your mortgage repayments.
The lender will often initially allow time for you to pay but if your debt begins to accumulate with no resolution, your home could be repossessed and sold.
Your guarantor’s property or savings could then be used to cover any shortfall, as your property might not sell for a sum large enough to cover the entirety of your mortgage debt.
Furthermore, if the guarantor mortgage has 100%LTV and house prices suddenly fall, you could end up in negative equity (when your mortgage debt is more than your property is worth).
That’s why all parties involved must seek independent advice from a solicitor who can explain the legal implications of taking out a guarantor mortgage for both you and your guarantor.
Guarantor mortgages: Your next steps now
There’s a lot to consider for both you and your guarantor. If your parents or another close relative or a family friend do decide to help you get a mortgage, you’ll need to check your eligibility and find out how much you can borrow and how much deposit, if any, you’ll be required to put down.
Their eligibility will need to be checked too, after all, they’ll need either a chunky bit of equity in their property or some substantial savings.
Look at reviews for online mortgage brokerages and then contact an expert to start the process.
Finding a guarantor mortgage lender doesn’t need to be a headache and a good broker will alleviate stress by managing paperwork and keeping you up to date along the way. It’s their job to compare the numerous lenders out there so you don’t have to.
Will my parents be on the deeds to my house with a guarantor mortgage?
No! Whoever your guarantor is, they will not be named on the deeds to your property and have no legal rights to ownership or residency.
What happens if my guarantor can't pay my mortgage?
If your mortgage debt goes unpaid and the issue remains unresolved for what the lender deems, a substantial amount of time, then the lender will likely put a court order to retrieve the debt.
How they do this depends on what type of guarantor mortgage you have. If your guarantor’s property is secured against the mortgage, their property may be repossessed, whereas if their savings are held as security for the mortgage, the amount owed plus any late repayment fees may be taken from the savings account.
If your guarantor refuses to pay, as opposed to being unable to, they are in breach of their contract and your lender has the right to start court proceedings to retrieve payment and settle the debt.
Can I get a mortgage without my parent’s help?
If your parents aren’t in a position to use their property or savings as collateral, that’s more than fair enough! They could help in other ways though, like gifting a small deposit or even reducing rent if you’re living at home and trying to save.
There are also first-time buyer schemes available in England like Shared Ownership which changed in 2021 to make it easier to buy an initial share and then later build equity by staircasing.
There’s also the First Homes programme, aimed at helping key workers and first-time buyers onto the property ladder, offering a minimum of 30% discount on a new build’s value.
Check out our guide on buying a home in 2021 or talk to a first-time buyer broker who can run you through the current and upcoming schemes that could help you on your way.