WHAT IS A GUARANTOR MORTGAGE?

WHAT IS A GUARANTOR MORTGAGE?
  • By Hayley Martin-Herkt

 

What is a Guarantor Mortgage?

A Guarantor Mortgage is when a guarantor agrees to use their security and/or assets, like their own property, as a guarantee that repayments will be made. If your account becomes in arrears the mortgage company may legally take these payments from your guarantor. A guarantor is normally a parent or other family relation.

Guarantor mortgages are more likely to be approved by a lender because the guarantor is essentially promising to meet the repayments in the case of the official borrower being unable to do so. The guarantor is required to maintain this situation until the mortgage is redeemed or under some schemes the loan to value ratio (LTV) has reached an agreed level. Typically, in this instance, lenders will want the LTV to have dropped to around 80% before the guarantor is released from the agreement.

Guarantor loans normally still require a deposit, although the level required does vary.

 

One type of Guarantor mortgage scheme allows you to join forces with your parents to boost your borrowing…

  • If you are unlikely to be accepted for a home loan based on your own income and savings, then the financial backing of a parent or relative can make all the difference.
  • Although it becomes a joint mortgage, your guarantor/parents do not become co-owners of the property.
  • It basically works by taking your parents’ or a relatives’ income(s) into account when the bank calculates how much to lend you.
  • If your application is accepted, then all parties are jointly liable for the mortgage. So, if you fail to make the repayments, then your guarantor/parent(s) will also be liable for this debt.

 

There are drawbacks to this type of scheme…

Everyone applying for the mortgage, whether as guarantors or prospective homeowners, are legally responsible for the monthly repayments. All parties must meet the eligibility criteria and mortgages of this type are only available to buyers in England and Wales.

If you miss payments, then everyone named on the mortgage could see their credit rating affected. And even if you are responsible for all the payments, the mortgage might affect any future borrowing your guarantors/ parents apply for, for example, if they want to take out a personal loan for home improvements on their own property.

Because of the potential pitfalls, any guarantors or family members who wish to be jointly named without owning the property must take independent legal and tax advice. This is usually a condition of the mortgage at outset.

If at a later date you operate the mortgage by yourself, based on your own income, you can re-mortgage and remove your guarantors/parents as joint holders. However, you should note that you can reapply to your existing or different lender, although you will need to be approved and may need to pay extra fees on top.

 

Family offset mortgages

 

These types of mortgages work by putting money into a savings account that is tied to the mortgage of the family member in question. This money is then used against the value of the mortgage, often resulting in a reduced level of interest being paid and increase in the actual repayment each month. A 5% deposit will still normally be required on top of this.

After a certain amount of time has passed or a certain amount of the debt has been repaid, the money is given back in full and sometimes with interest.

As mentioned all of the above mortgages have specific criteria and therefore each individual option has to be assessed on a case by case basis. Therefore, it is always important to seek good quality independent mortgage advice when considering the options open to you.

 


 

To find out more about your options and full details of the schemes available talk to Hayley from Gilbert Stephens Financial Services on 01392 346464 or visit www.gilbertstephensfs.co.uk/

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