A guarantor mortgage is a mortgage where someone else besides you is legally responsible for repaying the loan if you’re unable to do so.
A guarantor mortgage may be an option for those with little (or no) deposit, poor credit, less reliable income, or a number of other obstacles to borrowing.
Having a parent or close family member acting as guarantor for your mortgage could be the extra step you need to get on the property ladder.
They may help you access more money or better rates, but guarantor mortgages do carry risks, so it’s important to do your research first.
What is a guarantor mortgage?
A guarantor mortgage is a loan where someone (usually a family member such as a parent) provides extra security by agreeing to cover any repayments you miss.
If the guarantor can’t cover these repayments out of their ordinary income, then their other assets (e.g. savings or property) serve as collateral for the loan.
This means the lender could take the savings or sell the guarantor’s property to repay any shortfall on your mortgage.
Another option for recovering the loan is for the property to be repossessed.
However, this won’t be sufficient if the property has gone into negative equity (i.e. is worth less than the outstanding loan).
Here’s an example:
You have a £200,000 mortgage on a £250,000 but you are no longer able to make the repayments. The lender decides to repossess your property but calculates that it is only able to recover £150,000 from the sale. They look to the guarantor’s savings or property for the £50,000 shortfall.
The guarantor doesn’t own a share of the property and isn’t on the title deeds, but they are on the legal documents to outline the collateral they offer as security.
The other main advantage of a guarantor mortgage is that it means less risk for the lender – which in turn means that you can access more funds and may get better rates.
Who might need a guarantor mortgage?
A guarantor can help you get on the property ladder if you are struggling to get a mortgage. It might be because you have:
- bad or sparse credit history
- just started a new job
- a low or inconsistent income
- a low deposit
Who can be a guarantor?
Lenders want to be confident that they can rely on the guarantor to support you for a long time, which is why they usually ask for guarantors to be a parent.
In some circumstances, they will accept other close family members or spouses with separate bank accounts.
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.
A good credit history and assets, such as savings or property, are also a must. Each lender will have its own guarantor criteria.
You should check whether the guarantor has plans to take out a mortgage in the future because they may not be able to if they are still providing collateral for your loan.
The guarantor may not need to be on your mortgage for the duration of the loan. If you make every repayment in full for a period of time or build up some equity in the property, you can speak to your lender about removing the guarantor.
Alternatively, you may be able to remove the guarantor when you remortgage, but you should seek advice first because rejected applications could harm your credit score.
How much can I borrow with a guarantor mortgage?
With the extra security of a guarantor, you may be able to borrow up to 100 per cent of the property value.
These 100 per cent mortgages are still rare, though, so you are more likely to need at least a five per cent deposit. If you have poor credit history, lenders may still be cautious and only offer you a limited amount.
Every lender has its own criteria, so it is worth shopping around to see which ones are likely to accept you.
Bear in mind that your lender is unlikely to allow you to use a guarantor mortgage in combination with a government scheme like Help to Buy, Right to Buy or shared ownership. Though there is no legislation forbidding this, lenders generally prefer to avoid this additional complication.
Types of guarantor mortgage
These are the main guarantor mortgage types offered by lenders at the moment:
- Savings as security – with these mortgages, the guarantor deposits money into an account held by the bank, which earns interest. The guarantor will get these savings back unless you miss payments. In this case, the lender will either hold the savings until they recover the money from you or sell your property and use the savings pot to cover any shortfall between the amount the property sells for and the loan value.
- Property as security – these mortgages use the guarantor’s property as the security. If there is a shortfall after repossessing and selling your property, the guarantor could lose their property.
- Family offset mortgages – with this one, your guarantor deposits money into a savings account linked to your mortgage. The amount in the savings offsets the amount of the loan you pay interest on. It could save you a significant amount of money, but the savings won’t earn interest and may be locked away for a long period of time. If you miss payments, the lender will recoup the money in the same way as with a savings as security mortgage.
- Family link mortgage – this product gives you 90 per cent of a property’s value as a mortgage but the remaining 10 per cent is also a mortgage secured against the guarantor’s home (which they must own outright). You and the guarantor will have to repay the 10 per cent within the first five years. If you default, your guarantor is only responsible for that 10 per cent.
All guarantor mortgages carry risk, so it is important to seek impartial advice from a mortgage broker first.
What are the risks of guarantor mortgages?
The main risk with a guarantor mortgage is if you miss your repayments, the lender could recoup the money from the guarantor’s savings or home.
Any missed payments might also negatively impact the guarantor’s credit score. Being a guarantor will also affect their own mortgage application. However, being a guarantor won’t affect their tax bill.
It is wise to seek legal advice before agreeing to be a guarantor, and some lenders will request it to make sure the guarantor is aware of the risks.
As a borrower, you are open to the same risks as traditional mortgages – that their home may be repossessed.
There is also the risk that the guarantor will pass away while you have the mortgage. In this situation, you may be able to use their estate as security, or the lender may ask you for a new guarantor.
Can I get a guarantor mortgage with bad credit?
Trying to get a mortgage with bad credit can be tricky, and your options will be limited in comparison to those with a better credit history. That’s why adding a guarantor to your mortgage can make your application more appealing.
Ultimately, a mortgage is offered based on your level of financial security.
So, even if you have a bad credit rating, if your guarantor has plenty of collateral to offer as an alternative if you miss loan repayments – like savings, or a property – then this can be advantageous to your application.
What happens if my guarantor dies?
The death of your guarantor is not something you’ll want to consider – but it does happen, so it’s important to make contingencies.
So, what happens if your guarantor dies? It’s often up to the lender on how to proceed.
In some cases, you’ll be required to find a new guarantor, which is easier said than done. However, others may allow you to pay off some of the mortgage with your guarantor’s estate.
To ensure you won’t face difficulties should your guarantor die, it’s important to check your lender’s policy before making an application, to establish the situation you’ll be in if the worst happens.
How do I get a guarantor mortgage?
A number of lenders, including high-street banks, offer guarantor mortgages. Do bear in mind that the deal they can offer you will depend on your circumstances and those of your guarantor.
You can apply for a guarantor mortgage directly with providers online or by appointment, just as you would a traditional mortgage, but you will need personal and financial details of the guarantor.
You might find it easier to apply through an independent mortgage broker who will have access to a wide range of lenders and can advise you on the various products available.
