Getting onto the property ladder is never particularly easy but with unemployment rates increasing and major economic uncertainty, lenders have significantly tightened lending criteria. For many people, this means that they have had to put their dreams of buying their own home on hold for a while.
However, there are alternative solutions available to help people to buy property, including government schemes and arrangements such as guarantor mortgages.
What is a guarantor mortgage?
A guarantor mortgage is where another person, such as a relative, becomes a guarantor, agreeing to make the mortgage payments in the event that the person buying the property is unable to. This means that there is less risk for the mortgage lender, as the guarantor will have checks to confirm that they are reliable with making financial payments.
Typically, a guarantor mortgage will be the best option for someone who has had a mortgage application declined due to having an adverse credit history, or not having enough credit history to provide evidence to lenders that they are reliable at making credit payments.
The guarantor is required to sign legal documents that confirm that they will pay the monthly mortgage payment if, for any reason, the homeowner does not. While they will not appear on the property deeds (in the case of most guarantor mortgage types), they are legally bound to make the payments if required.
Guarantor mortgages are only offered by a select number of lenders and after the outbreak of COVID-19, some lenders removed this product from the market, so there are even fewer available now. However, a mortgage broker such as Boon Brokers, who is a whole-of-market broker, may be able to find you a guarantor mortgage (or a suitable alternative), if this is the type of mortgage you require.
Types of guarantor mortgages
There are a few different types of guarantor mortgage:
Savings as security
With this type of guarantor mortgage, the family member or friend will deposit an amount of their savings into a special savings account to use this as the security. Usually, the amount will be between 5-20% of the property price and it acts like a deposit. Once a certain amount of the mortgage has been paid off, the guarantor can take their money back.
If any payments on the mortgage are missed, the mortgage lender is able to access funds from the savings account to pay the owed payments. In some of these types of guarantor mortgage, the savings can earn interest, although the rates would be considerably less generous than a standard savings account.
Property as security
Instead of using savings as the security, there is also the possibility of using property owned by the guarantor as security. This involves a high element of risk for the guarantor, as the lender could take legal action to get the property repossessed if mortgage payments are missed on the mortgage that they are a guarantor for.
Joint mortgages and JBSP mortgages
Another solution for someone to buy a property is for their parent or another person to agree to have a joint mortgage which means that the property deeds are in joint names. This could be with a parent, or it could be with a friend or partner who will also live in the property. Having two incomes on the application can help to get it approved, compared to being based on just one income.
However, one of the drawbacks of this type of mortgage is that if the other person already owns a property, they will be required to pay the second property stamp duty charge, which can be very expensive.
A JBSP (Joint Borrower, Sole Proprietor) is similar in that the mortgage is joint between the guarantor and the buyer, but only the buyer’s name will be on the deeds. This means that the guarantor will not be subject to the stamp duty surcharge.
Who are guarantor mortgages suitable for?
Guarantor mortgages are suitable for people who are unable to buy a property themselves because they do not match the criteria required from a lender for a standard mortgage. This could be because:
- They have no deposit, or not enough deposit.
- They have a bad credit score.
- They are on a low income.
- They have little, or no credit history.
The main dependency is that they have someone that is willing to act as a guarantor for them and who will match the criteria required for a guarantor in terms of their credit score, savings amount or property equity.
A guarantor will usually be a parent helping their child to get a mortgage or another close family member, such as a grandparent.
Benefits for first time buyers
It can be difficult for first time buyers to buy property, especially when a minimum of 5% deposit is now required from many mortgage lenders. For people who want to buy their first property, if they do not have a deposit, or they do not have any credit (because they have not had a credit card or other type of credit), this is one of the only options.
The alternative options are the government schemes such as Help to Buy: Equity Loan and Help to Buy: Shared Ownership (we provide more details on these at the end of the article). Choosing a guarantor allows the ownership to stay with the buyer and their guarantor, rather than sharing ownership with a housing association.
Who can be a guarantor?
Some lenders specify that the guarantor must be a close family member, rather than a friend or aunt/uncle, for example. The guarantor must be able to provide the relevant type of security for the mortgage type, such as savings or property with equity. The guarantor must also have a good credit rating, as this will be checked as part of the application process.
Generally, as long as the security is in place, it will not matter if the guarantor is retired, although each lender’s criteria is different. Some may require that they have paid at least 50% off their own property mortgage.
Who is responsible?
In the first instance, the property buyer should pay the mortgage payment each month but in the event that they are unable to, the guarantor is legally responsible for paying it instead.
In the situation where the guarantor is unable to make the payment, whatever has been secured as part of the mortgage would then be at risk. So, that could be that savings are used to pay the mortgage or even that their own property is repossessed to generate funds to pay the outstanding mortgage payments.
In some cases, the lender will insist that the guarantor is named as a joint applicant, to help to reduce the risk of a payment being missed because the joint applicant will be more involved in the mortgage.
Costs for guarantor mortgage
Compared to a standard mortgage, the interest rates will often be higher for a guarantor mortgage and there are less deals available on the mortgage market. This could also include arrangement fees, which could have been avoided if there were more mortgage deal options.
If the guarantor is required to pay a second property stamp duty surcharge, then the costs of this will be higher. Usually, they will need to pay an extra 3% surcharge on top of any SDLT (Stamp Duty Land Tax) that is applicable.
Repaying a guarantor mortgage
Another option under a guarantor mortgage is to guarantee part of the mortgage, rather than all of it. For example, they could guarantee above 75% of the property value. In this case, the homebuyer may still need to put down some of the deposit.
Repayments work in the same way as a standard mortgage, in terms of monthly payments to pay the interest and capital. As long as each payment is met, the mortgage will run smoothly, but the guarantor must be fully aware of their financial responsibilities in the event that payments are missed.
Risks of being a guarantor
Even if you think someone will be a reliable mortgage payer, circumstances can change. If the buyer were to lose their job or become ill and cannot work, or their relationship breaks down (if they are cohabiting and sharing bills), this could affect their ability to make the repayments.
Other factors such as applying for loans or other types of credit could also affect their ability to make their monthly payments, if they cannot afford to pay all of their outgoing bills. They might not lose their job but could have their hours reduced, resulting in lower salary, so any guarantor must consider all of these risks before signing any legal documents.
Non-payment of the mortgage repayments will also affect the guarantor’s credit record but even if the mortgage payments are made, a guarantor mortgage connects your credit record to the other person, so a missed payment on another loan or bill could harm your credit rating too.
How to get a guarantor mortgage
There are not many guarantor mortgages available on the current market but a mortgage broker with access to whole-of-market deals is your best chance of finding one and ensuring it is one that best suits your needs.
Since the beginning of the COVID-19 outbreak, lenders have withdrawn many types of mortgage deals as the economic uncertainty and rising rates of unemployment present a higher risk for lending than pre-COVID-19.
Speaking to a broker such as Boon Brokers will help you to determine whether a guarantor mortgage will be a suitable option and whether it is likely that you will meet the criteria.
Alternatives to a guarantor mortgage
If you are unable to get approved for a guarantor mortgage, it is not the last option because you could still be able to buy your own property using Help to Buy or Shared Ownership. With the Shared Ownership scheme, you buy a percentage of the property, usually between 25% and 75%, so you are only required to obtain a mortgage for that value and the deposit will be lower.
With Help to Buy Equity Loan, you buy a new property and take out an equity loan for up to 20% of the property (up to 40% is available in London). With both of these types of schemes, you are able to eventually own the whole property, as long as you agree to that option when you arrange the mortgage and purchase.
With no 100% mortgages available and stricter lending criteria as a result of the COVID-19 pandemic, many people are struggling to buy their own property if they do not meet the criteria. One option is to wait and save for a bigger deposit, or to try to improve their credit rating, if these are the factors that are preventing them from having their mortgage approved.
The next best option for people who have a willing parent or relative, is the guarantor mortgage that will allow them to get onto the property ladder and then once they have paid off a certain amount, the guarantor is able to come off the mortgage.
If you are interested in applying for a guarantor mortgage, or any other type of mortgage, Boon Brokers can help you to review your choices and advise what the best financial solution will be based on your circumstances.