If you’re worried that you might not be able to borrow enough to purchase your dream home with a traditional mortgage, you might want to to consider opting for a guarantor mortgage instead. A guarantor is usually a parent or family member who is willing to put some of their money or financial assets forward as security on a mortgage loan. Using a guarantor will increase the amount that you’ll be able to borrow.
If you miss a payment however, the guarantor must come up with the funds to pay it.
There are times when a guarantor is released from their obligation. For instance, if your financial circumstances alter while paying for the mortgage so that the lender is more confident in your ability to pay off the payday loan on your own, or after you have already paid off a portion of the mortgage.
Typically guarantors will put their own property up as collateral against the loan. Guarantors will therefore have to already own a large share of their property outright.
In theory, anyone can be your guarantor. However, some lenders will only allow certain types of people to act as guarantor, usually an older relative such as a parent, grandparent, or step parent.
In many respects, a guarantor mortgage works in the same way as a normal mortgage does. For instance, you’ll still have to pay back the full amount you borrowed with interest, alongside all the mortgage, solicitor and valuation fees that are attached to getting a mortgage.
So what exactly happens when you can’t pay your mortgage?
If you default on your loan payments, the lender will repossess the property and if they do not make back the full amount of the loan, your guarantor will have to pay the remaining balance. Unfortunately, this means the guarantor could lose their own house to pay off the debt.
Typically, there is a cap on how much of the loan a guarantor can be responsible for, usually about 25-35% of the total mortgage.
Who should consider guarantor mortgages?
Guarantor mortgages are a good option for those who want to get onto the property ladder, but feel held back because of a low income, lack of substantial deposit, or have a bad or weak credit history. These factors will all affect your ability to get a mortgage, and having a guarantor will add a sense of extra security for the lender.
In London, young adults living are increasingly finding themselves unable to buy a home and their parents understandably wish to assist them. Guarantor mortgages are an excellent way for these young people to join the property ladder without having to raise funds for a sky-high deposit.
Types of guarantor mortgage
There isn’t just one way to get a guarantor mortgage. Most often you will choose between the family offset, deposit, and link mortgages.
The Family offset mortgage is when an older member of the family places their savings into a separate account that is linked to the homebuyer’s mortgage. The amount of money in the account will offset what is owed on the loan and you will pay interest only on the remaining amount. Therefore, if you have a loan for £200,000 and the guarantor placed £50,000 into the linked account, you would only pay interest on £150,000. This type of mortgage allows you to pay off your loan more quickly. One negative aspect of a family offset mortgage, however, is that the guarantor is typically unable to access money in the account until you have paid off roughly £75% of the loan nor can they make interest on their savings.
The family deposit mortgage is similar to an offset mortgage in that the guarantor places money into a special account. However, in this case, they will still be earning interest on their savings.
The family link mortgage is an option through the Post Office and it allows the homebuyers to borrow 100% of the property’s worth. 90% of the money borrowed is a mortgage and the remaining 10% is a loan secured against the guarantor’s own home.However, you should be wary of fees attached to guarantor mortgages, which can be surprisingly steep and make mortgage comparisons difficult to understand. It’s usually best to seek advice from a mortgage broker because they can do extensive research on the market and look into the hidden fees or unexpected downsides of certain types of loans.