Purchasing a home is a significant milestone, but it can be challenging for individuals with limited income or a less-than-perfect credit history to secure a mortgage. That’s where guarantor mortgages come into play. With the additional security of a guarantor, doors can be opened for aspiring homeowners who may not otherwise qualify for a mortgage on their own.
Whether you are a first-time buyer, have a limited deposit or face other financial constraints, understanding the ins and outs of guarantor mortgages can help you make an informed decision about this potential pathway to homeownership.
What Are Guarantor Mortgages?
A guarantor mortgage is a type of mortgage that involves a third party, known as the guarantor, who agrees to take responsibility for the mortgage repayments if the borrower is unable to meet them. This additional security provided by the guarantor increases the borrower’s chances of obtaining a mortgage, even with limited income or a bad credit history. The guarantor typically needs to have a good credit score, sufficient income and be willing to take on the financial obligations associated with the mortgage.
Why Do I Need a Guarantor For My Mortgage?
Guarantor mortgages are beneficial for individuals who may not meet the strict criteria set by lenders. They can help first-time buyers, young professionals or those with limited income to overcome the barriers to homeownership.
By having a guarantor, borrowers can access more competitive interest rates, higher loan-to-value ratios and larger mortgage amounts. This type of mortgage provides lenders with the assurance that the mortgage will be repaid, minimising the risk involved.
Who Can Be a Guarantor For A Mortgage?
A guarantor is typically a family member, such as a parent or grandparent, but it can also be a close friend or relative. To be eligible, the guarantor must have:
- a good credit history
- sufficient income to cover the mortgage repayments
- a willingness to take on the responsibility if the borrower defaults
Lenders may also require the guarantor to have a certain level of equity in their own property or savings.
What Types of Guarantor Mortgages Are There?
There are different types of guarantor mortgages available in the market, providing flexibility and options for borrowers. Here are some common types:
Family Guarantor Mortgage – This is the most common type of guarantor mortgage. It involves a family member, usually a parent or close relative, acting as the guarantor. The guarantor offers their own property or savings as security for the loan. This allows the borrower to access a higher loan amount or a more favorable interest rate.
Linked Savings Guarantor Mortgage – In this type of mortgage, the guarantor places a sum of money in a linked savings account with the lender. The funds serve as security for the mortgage and they are held for a specified period. After that period, provided the mortgage payments are made on time, the guarantor’s funds are released back to them.
Property as Security Guarantor Mortgage: With this type of guarantor mortgage, the guarantor offers their own property as security for the loan. This can be an alternative for borrowers who don’t have a guarantor with sufficient savings or prefer not to involve savings.
How Can I Apply for a Guarantor Mortgage?
Applying for a guarantor mortgage involves gathering the necessary documentation, including proof of income, identification, credit history and details of the guarantor. It is advisable to seek the guidance of a mortgage broker who specialises in guarantor mortgages.
They can assess your eligibility, compare available options from different lenders and guide you through the application process. A mortgage broker can also negotiate favorable terms and help ensure a smooth and efficient mortgage approval.
What Are The Pros and Cons of Guarantor Mortgages?
When considering a guarantor mortgage, it’s essential to weigh the pros and cons to make an informed decision. Understanding the advantages and disadvantages can help borrowers assess whether a guarantor mortgage is the right option for their individual circumstances:
Pros of Guarantor Mortgages: |
Cons of Guarantor Mortgages: |
|
|
|
|
|
|
|
|
|
|
What Happens If You Cannot Repay A Guarantor Mortgage?
If the borrower is unable to make the mortgage repayments, the guarantor becomes responsible for fulfilling the financial obligations. This means the guarantor’s income and credit history will be taken into account and they may be pursued for repayment by the lender. It is crucial for both the borrower and the guarantor to have open and honest communication about the mortgage and to have a plan in place in case financial difficulties arise.
Are There Government Schemes and Support for Guarantor Mortgages?
Several government schemes can assist borrowers in obtaining a guarantor mortgage. The Help to Buy Guarantor Scheme, for example, enables first-time buyers to purchase a home with a smaller deposit by using a guarantor. Shared ownership programs may also have guarantor options, allowing individuals to buy a portion of a property and pay rent on the remaining share.
Conclusion
Guarantor mortgages can be a valuable tool for homebuyers who face challenges in securing a traditional mortgage. By involving a guarantor, borrowers can improve their chances of obtaining a mortgage and achieving their homeownership dreams. However, it’s crucial to fully understand the responsibilities and implications for both borrowers and guarantors before proceeding with this type of mortgage arrangement.
By delving into the details of guarantor mortgages, individuals can be equipped with the knowledge they need to make informed decisions and explore suitable mortgage options that align with their unique circumstances. Remember, seeking professional advice from a mortgage broker is always recommended to ensure a tailored approach and a smooth mortgage application process.
