What Is a Guarantor Mortgage?
A guarantor mortgage is a home loan where a third party, usually a parent or close family member, agrees to cover your mortgage payments if you can't. The guarantor doesn't own any share of the property but takes on the legal responsibility of ensuring the mortgage is repaid.
Guarantor mortgages are designed to help borrowers who might struggle to get a mortgage on their own, perhaps because of a limited deposit, lower income, or thin credit history. By having a guarantor, the lender has additional security, which can make them more willing to lend.
There are different types of guarantor arrangements. Some require the guarantor to put up their own property or savings as security, while others rely on the guarantor's income and creditworthiness alone. The specific requirements depend on the lender.
Types of Guarantor Mortgage
Savings-based guarantor: The guarantor deposits a sum of money, often 10-20% of the property value, into a savings account held by the lender. This money acts as security for the loan and is usually returned after a set period, provided the borrower has kept up with payments.
Property-based guarantor: The guarantor uses equity in their own property as security for the borrower's mortgage. If the borrower defaults, the lender has a legal charge on the guarantor's home, which in extreme cases could put it at risk.
Income-based guarantor: Some lenders use the guarantor's income alongside the borrower's to calculate the maximum loan amount, allowing the borrower to borrow more than they could on their own. The guarantor agrees to step in and cover payments if the borrower can't.
Risks for the Guarantor
Being a mortgage guarantor carries significant financial risk. If the borrower fails to make payments, the guarantor becomes legally responsible for covering them. In the worst case, the guarantor could face having their own savings seized or their property repossessed.
The guarantor's own borrowing capacity may also be affected. Because they've committed to covering another mortgage, lenders may factor this obligation into their affordability calculations if the guarantor wants to borrow money themselves.
It's essential that anyone considering being a guarantor receives independent legal and financial advice before committing. They need to fully understand the worst-case scenario and be confident they could cover the mortgage payments without jeopardising their own financial security.
How Long Does the Guarantee Last?
The length of a guarantor arrangement varies by lender and product. Some guarantor mortgages release the guarantor once the borrower has built up sufficient equity or demonstrated a solid payment track record, often after a period of several years.
For savings-based guarantor products, the guarantor's savings are typically held for a set period, commonly three to five years, after which they're returned provided the borrower has met all payment obligations.
In some cases, the guarantor remains liable for the life of the mortgage unless the borrower remortgages to a new deal that doesn't require a guarantor. As the borrower's financial situation improves and they build equity, they may be able to qualify for a standard mortgage independently.
Important: Your home may be repossessed if you do not keep up repayments on your mortgage. There will be a fee for mortgage advice. The actual rate available will depend on your circumstances. Think carefully before securing other debts against your home.