When it comes to buying a home, getting a mortgage is often the biggest hurdle. With stricter lending criteria and growing house prices, many first-time buyers struggle to secure a mortgage on their own. That’s where a guarantor mortgage comes into play. In this article, we’ll explain what a guarantor mortgage is, how it works, the benefits and drawbacks, and who may be best suited to use this type of mortgage.
What is a guarantor mortgage?
A guarantor mortgage is a type of mortgage arrangement in which a third party, typically a family member or close friend of the borrower, agrees to be legally responsible for the mortgage payments if the borrower is unable to meet their repayment obligations. This type of mortgage is designed to help individuals who may not qualify for a mortgage on their own due to factors such as insufficient income, poor credit history, or limited savings for a down payment.
Guarantor mortgages can be beneficial for first-time homebuyers or those with less-than-perfect financial situations, as it can enable them to secure a mortgage that they may not have otherwise been able to obtain. However, it’s important for both the borrower and the guarantor to fully understand the implications and potential risks involved, as the guarantor is ultimately liable for the mortgage payments if the borrower defaults.
How do guarantor mortgages work?
Guarantor mortgages work by involving a third party, usually a family member or close friend, who agrees to take on the financial responsibility of the mortgage if the borrower is unable to make the required payments. Here’s a step-by-step explanation of how guarantor mortgages typically work:
Application: The borrower applies for a mortgage with a lender, expressing the need for a guarantor due to factors such as a low credit score, insufficient income, or lack of a sufficient down payment.
Guarantor selection: The borrower selects a guarantor who is willing to support their mortgage application. This person should ideally have a stable income, good credit history, and a strong financial background to be considered a suitable candidate by the lender.
Lender assessment: The lender will assess both the borrower’s and the guarantor’s financial situations, including their credit histories, incomes, and other relevant factors. The lender will then determine whether the mortgage application is acceptable, based on the combined financial strength of the borrower and the guarantor.
Mortgage approval: If the lender approves the mortgage application, the guarantor will be required to sign a legal agreement stating that they will be responsible for the mortgage payments if the borrower defaults. This agreement is binding and can have significant financial implications for the guarantor.
Mortgage repayments: The borrower makes regular mortgage payments as agreed with the lender. If the borrower is unable to make these payments, the guarantor is legally obligated to cover the missed payments and ensure the mortgage remains in good standing.
Release of guarantor: In some cases, after a certain period or when certain conditions are met, the guarantor can be released from their obligations. This usually occurs when the borrower has demonstrated a history of consistent mortgage repayments or when the borrower’s financial situation has significantly improved, reducing the lender’s perceived risk.
It’s important for both the borrower and the guarantor to understand the risks and responsibilities involved in a guarantor mortgage before entering into such an agreement. The guarantor should be aware that they may be called upon to cover mortgage payments if the borrower is unable to do so, and that this could have a significant impact on their own financial situation.
Who can be a guarantor?
In the UK, a guarantor for a mortgage is typically a family member or close friend who agrees to take on the financial responsibility of the mortgage if the borrower is unable to make the required payments. While specific requirements may vary between lenders, a guarantor should generally meet the following criteria:
Age: Guarantors usually need to be at least 18 years old and may have an upper age limit, typically around 65-75 years, by the time the mortgage term ends. This is because lenders want to ensure that the guarantor can feasibly continue working and earning an income throughout the mortgage term.
Financial stability: Guarantors should have a stable income, a good credit history, and a strong overall financial background. Lenders will assess the guarantor’s financial situation to determine if they can comfortably cover the mortgage payments if the borrower defaults.
Equity or savings: In some cases, a guarantor may be required to provide security in the form of property equity or savings. This means that the guarantor’s own property or savings could be at risk if the borrower defaults on the mortgage payments.
Residency: Guarantors should generally be UK residents, as this makes it easier for the lender to take legal action if necessary.
Relationship to the borrower: While it is most common for guarantors to be close family members, such as parents or siblings, some lenders may also accept close friends or other relatives. However, the guarantor should not have a financial interest in the property being purchased.
It’s essential for both the borrower and the guarantor to understand the responsibilities and potential risks involved in a guarantor mortgage. The guarantor should be fully aware of their obligations and the impact it could have on their financial situation if the borrower is unable to make mortgage payments.
Who is a guarantor mortgage suitable for?
A guarantor mortgage is suitable for individuals who might have difficulty qualifying for a mortgage on their own due to various factors. These individuals may benefit from the support of a guarantor to secure a mortgage. Some common scenarios where a guarantor mortgage may be suitable include:
First-time homebuyers: Those who are purchasing their first property often lack a substantial deposit or have a limited credit history. A guarantor mortgage can help them qualify for a home loan they might not otherwise be able to obtain.
Low income or unstable employment: Borrowers with low income, irregular income, or an unstable employment history might struggle to qualify for a mortgage. In such cases, a guarantor can provide the lender with additional assurance, increasing the chances of mortgage approval.
Poor credit history: If a borrower has a poor credit history due to missed payments, defaults, or other credit issues, they may find it challenging to secure a mortgage. A guarantor with a strong credit history can help mitigate the risk for the lender, making it more likely for the borrower to be approved.
Self-employed individuals: Self-employed borrowers may face difficulties in providing a consistent income history or meeting the lenders’ standard requirements. A guarantor can provide extra security for the lender in this situation.
Insufficient deposit: If a borrower doesn’t have a large enough deposit to meet the lender’s requirements, a guarantor mortgage can help bridge the gap and increase the likelihood of mortgage approval.
It’s important to note that while a guarantor mortgage can be beneficial in these situations, both the borrower and the guarantor should be fully aware of the responsibilities and potential risks involved. The guarantor must understand that they are legally obligated to cover the mortgage payments if the borrower defaults, which could significantly impact their financial situation.
What are the risks of a guarantor mortgage?
A guarantor mortgage can be helpful for borrowers who have difficulty securing a mortgage on their own. However, there are risks associated with this type of mortgage for both the borrower and the guarantor. Some of the risks include:
Financial strain on the guarantor: If the borrower is unable to make mortgage payments, the guarantor is legally obligated to cover those payments. This can put significant financial strain on the guarantor and potentially impact their credit score, ability to borrow in the future, or even lead to the loss of their own property or savings if they are used as security.
Relationship strain: A guarantor mortgage can put pressure on the relationship between the borrower and the guarantor, especially if the borrower struggles to meet the mortgage payments. This can result in disputes or a breakdown of trust between both parties.
Difficulty in obtaining future credit: Acting as a guarantor can impact the guarantor’s creditworthiness and borrowing capacity. Being a guarantor might make it harder for the guarantor to obtain future loans or mortgages, as lenders may view them as already having a significant financial commitment.
Impact on the guarantor’s property: If the guarantor’s property is used as security for the mortgage, and the borrower defaults, the guarantor’s property may be at risk of repossession to cover the outstanding mortgage debt.
Negative equity: If the property value falls and the borrower needs to sell, both the borrower and the guarantor might face a situation where the sale proceeds are not enough to cover the outstanding mortgage balance. In such cases, the guarantor might be liable for the remaining debt.
To minimise these risks, it’s essential for both the borrower and the guarantor to fully understand the terms of the guarantor mortgage and their respective responsibilities. The guarantor should carefully assess their own financial situation and be confident in the borrower’s ability to meet the mortgage payments before agreeing to act as a guarantor. Additionally, the borrower should prioritise making timely mortgage payments to avoid putting undue strain on the guarantor.
Do guarantors get credit checked?
Yes, guarantors typically undergo a credit check as part of the mortgage application process. Lenders want to ensure that the guarantor has a strong credit history and is financially stable enough to cover the mortgage payments if the borrower defaults. The credit check helps lenders assess the guarantor’s creditworthiness and their ability to meet the financial obligations tied to the mortgage.
In addition to a credit check, lenders may also assess the guarantor’s employment status, income, outstanding debts, and other financial factors to get a comprehensive understanding of their financial situation. It’s essential for the guarantor to be aware of the potential impact on their credit score and their ability to obtain credit in the future if they agree to be a guarantor for a mortgage.
What happens if my guarantor is unable to make repayments too?
If both the borrower and the guarantor are unable to make the mortgage repayments, the situation becomes similar to any other mortgage default scenario. The lender may take the following actions:
Contact the borrower and the guarantor: The lender will likely contact both parties to discuss the missed payments and attempt to find a solution, such as arranging a temporary payment plan or adjusting the repayment terms.
Legal action: If the borrower and guarantor continue to be unable to make the repayments and no alternative solution is reached, the lender may initiate legal proceedings to recover the outstanding debt.
Repossession: As a last resort, if the mortgage remains in default, the lender may seek to repossess the property to recover the outstanding debt. The repossession process can involve the forced sale of the property, with any proceeds used to pay off the mortgage debt.
Remaining debt: If the sale of the property does not cover the full amount of the outstanding mortgage debt, both the borrower and the guarantor could be held liable for the remaining balance.
It’s essential for both the borrower and the guarantor to fully understand the risks and responsibilities involved in a guarantor mortgage. It is crucial to maintain open communication with the lender if either party faces financial difficulties or anticipates problems with making mortgage repayments. In many cases, lenders are willing to work with borrowers and guarantors to find a solution that helps avoid repossession and other severe consequences.
Final thoughts
A guarantor mortgage can be a valuable tool for individuals who need assistance securing a home loan. By involving a third party with a strong credit history, borrowers can potentially access better interest rates and more flexible lending criteria. However, it’s crucial for both the borrower and the guarantor to understand the risks involved and carefully consider the potential impact on their financial futures before entering into a guarantor mortgage agreement.
Get a free initial consultation from a mortgage broker.
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