Not having adequate financial arrangements could put lenders off, especially Mortgage lenders. However, if a friend or family member agrees to co-sign your mortgage as a Guarantor, your lender might approve your loan.
In this article, we’ll learn more about how guarantor mortgages work and how much you can borrow off it.
What is a guarantor mortgage?
A guarantor mortgage is a home loan wherein a family member or a close friend agrees to bear some risk of the loan as a guarantor. This means that they can declare their assets as collateral against your loan. So if you, as the borrower default on repayments, the lender can repossess your guarantor’s asset to cover the loan.
Guarantor mortgages are a good form of credit for those who can’t otherwise qualify for a mortgage. It can also help you borrow a greater loan amount. The downside is for the guarantor who is at the risk of losing their asset in case of a shortcoming on your end.
Who is a guarantor mortgage for?
A guarantor mortgage can help you purchase a property if:
- Your income is low
- You pay a minimal deposit or none at all
- You have a below-average credit score
- You do not have an adequate credit history
Who can co-sign your mortgage guarantee?
A lot of lenders will require a parent or close family member to co-sign as a guarantor. Some may allow close friends as well. Here’s what your guarantor needs to possess if they want to co-sign your guarantor mortgage:
- Savings or property: The lender may secure a part of the guarantor’s savings or their property to compensate a default in the loan.
- A decent credit history: This helps the lender assess the creditworthiness of your guarantor. It is important for them since they will hold the guarantor accountable for a default.
- Knowledge of risks: Many lenders ask for a guarantor who has received legal advice about the risks involved in becoming a guarantor.
What if you can’t pay?
Your guarantor and their asset are safe if you make timely repayments in full. However, if you happen to default, the lender can legally repossess and sell the asset declared against the loan. For instance, if you borrowed £150,000 in your guarantor mortgage, but were only able to return £125,000, the lender will recover the £25000 by selling your guarantor’s collateral. It could either be their savings or their property.
A good way to save your guarantor from the risk is to switch to another mortgage which doesn’t require you to have a guarantor. This is termed as re-mortgaging. If you’ve maintained a track record of timely repayments, your improved credit score could fetch you better deals.
This can be done once you’ve built sufficient equity in your property. This can be done by paying a significant sum of your mortgage and if there has been any growth in the value of your property.
Types of guarantor mortgages
Guarantor mortgages can be categorized as Savings and Property-based. We’ve explained the difference between the two below:
- Savings as guarantee: Some lenders prefer this type of guarantor mortgage wherein a family member deposits a sum of money into a special savings account. This amount could be anywhere between 5% and 20% of the property’s cost. The lender withholds this amount for an agreed-upon period of time, or until the amount you owe decreases below a certain value, 60% per se. Your guarantor can also earn interest in this savings mortgage account. Now if you default on the loan, the lender can hold on to this money for longer. They will use it to recover balance.
- Property as guarantee: Herein, a charge is placed on the guarantor’s property. This implies that the guarantor must own a higher proportion of their property before serving it as collateral. Now if you default on the loan and fall short of a low amount, the guarantor could lose their home. For instance, if you’ve paid £125000 of your £150000 guarantor mortgage, the guarantor could lose their home over £25000.
How much can you borrow?
The amount of money that you can borrow will majorly depend upon your financial capability and standing. But guarantor mortgages allow you to borrow a greater sum of money. This can be done in the following ways:
- 100% L-T-V: Many lenders might allow you to borrow 100% of the property’s value, meaning you don’t need to deposit anything. Saving for a deposit can sometimes take longer. So this will help you step up on the property ladder, without the hassle of a deposit.
- Guarantor’s Income: Low income is one of the biggest reasons why borrowers don’t get approval on their mortgage. This is because the lender might think that you cannot afford the property that you’re aiming to buy. So adding your guarantor’s income into the equation could amplify your chances of getting a guarantor mortgage. For instance, a lender could offer you a mortgage of £150000, but taking your guarantor’s income into account, they might even offer you £200,000.
Guarantor mortgages can be a great way for people with average financial circumstances to jump up on the property ladder. However, both the guarantor and the borrower must take legal advice from a solicitor to understand the implications of the same.