Guarantor Mortgages are a way of securing a mortgage loan when you don’t have a deposit or your credit history is putting lenders off. Someone agrees to act as guarantor for you, committing to make the repayments on your mortgage if you fail to do so. This is most commonly a parent or grandparent, which is why these products are often referred to as family-assisted mortgages.
A guarantor owns no share in the property purchased, nor are they named on the deeds. They simply sign a legal document stating that they agree to cover the mortgage repayments if the borrower cannot pay themselves.
Who are guarantor mortgages suitable for?
- People with a low income
- People with a poor credit score
- Someone with no deposit or a small deposit
- Someone who wants to spend more on a property than lenders will let them borrow
Who can be a guarantor?
To act as a guarantor, lenders usually require that you meet the following criteria:
- You have a good credit history
- You own your own home or have some form of equity
- Your income is high enough for you to be in a position to cover the mortgage repayments
A guarantor must possess sufficient assets to offer as part of the legal guarantee to the lender. Acting as a guarantor on a mortgage may mean you have to sign over a charge on your own property, giving the lender the authority to repossess it if repayments are not met.
If a guarantor doesn’t own a property or has enough put away, cash savings can be offered as a guarantee. The agreed funds are put into a savings account with the lender and are released once a specified portion of the mortgage has been paid off. Typically, a guarantor is released from the mortgage agreement once the loan-to-value (LTV) has been reduced to around 80%, although it will vary depending on the lender and the applicant’s circumstances. During this time, the guarantor will not be able to access the funds. They will usually, however, be eligible to earn interest on them.
What happens if a payment is missed?
Missing a mortgage repayment is never ideal, but with guarantor mortgages, it’s especially important that you’re aware of the consequences.
Each lender will have their own policy, but there are several things that could happen:
- You may be given more time to make the payment
- The lender may charge you a fee for making a late repayment
- Your lender may ask the guarantor to make the payment on your behalf
If you continue to miss repayments, the lender may take further action:
- They may increase the time the guarantor is tied to the mortgage agreement
- Repayments could be taken from the guarantor’s savings account
- The property associated with the mortgage could be repossessed
If you still owe the lender money after the property has been repossessed, they may go on to take further action to recover what they are owed.
Our top tips for guarantor mortgages:
Be honest. It’s important that the borrower and guarantor are open with each other and consider all possible outcomes before entering into a contract.
Set boundaries. If you’re acting as a guarantor for someone, it’s important to remember that the property will be the borrower’s home. Relationships could be damaged if you try to impose rules or have a say in matters beyond the mortgage agreement.
Seek professional advice. Financial matters can be complicated and entering into a mortgage agreement is a big deal! Formal agreements remove any grey areas and could save you from running into difficult situations in the future.
Think a guarantor mortgage might be the right option for you? Key Mortgage Advice can guide you through the process for no fee! We have offices in Southport, Preston and Garstang, or we can assist you over the phone if you prefer. You can find all of our contact details here.
