A guide to guarantor mortgages
In the UK It is getting harder and harder these days to get on the property ladder for young people. In fact, as stated in The Guardian a report from February this year by the Institute for Fiscal Studies showed that the likelihood of young adults aged between 25 to 34 on an income between £22,000 and £30,600 each year had more than halved in the last two decades.
One of the reasons why is due to rising house prices, meaning that people these days in the UK should expect to have at least £18,000 in savings in order to save for the 10% deposit on a house, based on the average home in the country costing just over £180,000. This figure rises even higher in the capital, where the average property in London costing £500,000 meaning you will need about £50,000 to put down a deposit. Unsurprisingly, being able to raise this money proves to be extremely challenging for young people.
With home ownership collapsing in the last 20 years dramatically, becoming out of reach for many young people, it is becoming increasingly commonplace for parents to provide a helping hand to make their dreams of owning a home come true. A popular way of doing this is through guarantor mortgages. In this guide, Guarantor Loans will explain how these kinds of mortgages work.
What is a guarantor mortgage?
A guarantor mortgage works by passing all of the liability (or depending on the arrangement that you have, some of it) onto another person, this is usually a parent or close family member. This means that this person will be responsible for covering the buyer in the event that they default on their repayments, and will, therefore, pay on their behalf if they can’t.
This means that the person who chooses to be a guarantor will be locked-in to the mortgage agreement, until a point has been reached where the borrower has made enough mortgage repayments to turn the mortgage into a loan to value ratio (also known as LTV) that the lender is comfortable with. In most cases, this will be over 80% before it can be turned into an LTV, or if the borrower has remortgaged onto another product.
As a result, a guarantor needs to be aware that they are taking on a certain amount of risk in taking on this contract, as it could potentially affect the guarantors ability to receive a loan for themselves in the future, or it could affect the guarantors borrowing power that may be needed at a later date.
Who are guarantor mortgages for?
These are usually aimed at people who do not have a high enough income in order to be able to meet a mortgage lender eligibility criteria to get the deal that they want. It may also be due to having a bad credit history.
In certain respects, a guarantor mortgage works in a similar way to a credit builder card, as the parent or family member is helping the borrower to improve their credit score, which will then enable them in the future to lend money without needing the help of their parents.
How do guarantor mortgages work?
Let’s start with an example that will explain in greater detail how guarantor mortgages work.
If you are looking to buy a property for £160,000 and have an annual income of £40,000 each year, but you are in the position where the mortgage lender will only provide you with a mortgage of £120,000, that still leaves you with a £40,000 shortfall meaning that you need to find other ways in which to finance this.
What this means in terms of the guarantor then, is that they will need to have an income that will enable them to afford the repayments that would be required for a £160,000 mortgage in order to be a suitable candidate to become a guarantor. To clarify, this means that that the guarantor needs to not just be able to afford the shortfall.
Or it is quite often the case for a guarantor to offer their own home as a form of collateral against the new property for the buyer. Unfortunately, this means that in the worst possible case scenario where repayments are missed, the guarantor could end up losing their own home in order to cover their children’s debt.
How do I become a guarantor?
If you are considering becoming a guarantor for a mortgage, you should make sure that you are fully aware of what the agreement that you have signed up to and are prepared for the consequences if payments were missed.
In order to qualify as a suitable guarantor, you will need to give evidence to the mortgage lender that you will be able to pay for the new mortgage payments, as well as the payments you currently need to make too. Whilst the exact criteria will differ from lender to lender, it a guarantor will typically need:
- To have a good credit history
- Own their own property
- Have significant equity in their property if they do not own it
- Have a stable and high enough income to make the repayments
What happens if a payment is missed?
Again, all mortgage lenders have different ways of handling missed repayments when it comes to guarantor mortgages. However, generally speaking, the lender will give the borrower a certain amount of time to get back on track with payments, before then asking the guarantor to make the payment on your behalf.
But if you start to become even further behind with repayments for your mortgage it could mean that it ends up becoming repossessed, if money is still owed after repossession, it could mean that the guarantors home is also then taken too.