What is a guarantor mortgage?
A guarantor mortgage is a home loan where a parent or close family member takes on some of the risk of the mortgage by acting as a guarantor. This usually involves them offering their home or savings as security against the loan, and agreeing to cover the mortgage payments if the homeowner defaults (misses a payment). Some guarantor mortgages even allow you to borrow 100% of the property’s value by using your parent’s collateral in place of a deposit. On the plus side, guarantor deals might help you get a mortgage or allow you to borrow more. The main downside is that the guarantor could be liable for any shortfall if your property has to be repossessed and sold.
Who are guarantor mortgages suitable for?
A guarantor mortgage could be suitable if you’re looking to buy a property with…
- A low income: lenders will decide how much to lend you based on your income, so having a guarantor may enable you to get a bigger loan.
- A small/no deposit: you could potentially borrow up to 100% of a property’s value with a guarantor mortgage.
- A bad credit score: having a guarantor might make a lender more inclined to offer you a loan.
- Little or no credit history: for example, if you’ve never had a credit card.
- An independent mortgage broker can give you more in-depth advice on whether a guarantor mortgage is suitable for you.
Who can be a mortgage guarantor?
lenders will require the guarantor for your mortgage to be a close family member – usually a parent. Your guarantor will need to have:
- Savings or property: lenders will either hold some of your guarantor’s savings in a locked account or take legal charge over a portion of their property to secure the mortgage.
- A good credit history: so lenders can trust that they are financially reliable.
- Received legal advice: a requirement from some lenders in order to confirm guarantors are aware of the risks.
Guarantor liability if you can’t pay your mortgage
If you don’t miss your repayments, your guarantor won’t have to do anything. However, if missed repayments mean that the lender has to repossess and sell your property, both you and your guarantor would usually be responsible for any shortfall if the property is sold for less than the amount still owed on the mortgage. For example, if you owed the lender £150,000 but they were only able to recover £125,000 by repossessing and selling your property, the £25,000 difference could be taken from your guarantor’s savings or property, depending on what they used to guarantee the mortgage. The best way to minimise this risk is to remortgage as soon as you can to a deal which doesn’t require a guarantor. This will be possible as soon as you’ve built up enough equity in your property (by paying down your mortgage plus any growth in its value).