Guarantor mortgages: Are they a good idea?

Plus, the four scenarios that might have you considering a guarantor mortgage

Guarantor mortgages: Are they a good idea?

While there are many benefits to obtaining a guarantor mortgage, there are plenty of potential downsides—especially for the guarantor. Prior to reaching out, it is important to know the pros and cons. To find out how a guarantor mortgage works, the different types of guarantor mortgages, and whether it is right for you, read on.

What is a guarantor mortgage? 

A guarantor mortgage is a home loan where a portion of the risk of the mortgage is taken on by a guarantor, usually a parent or a close family member. When agreeing to a guarantor mortgage, the guarantor will often offer their property as security against the loan or savings. A guarantor mortgage also means the guarantor will agree to pay the mortgage payments if the homeowner misses a payment, or defaults. Your guarantor’s collateral, in some cases, can even be used to borrow 100% of the home’s value instead of using a deposit.

As with any long-term and costly arrangement, a guarantor mortgage offers both pros and cons. One pro is that a guarantor mortgage will help you get a home loan or even set you up to borrow more money. On the other hand, if your property has to be repossessed and sold, your guarantor will likely be liable for any shortfall.

Who might need a guarantor mortgage?

There are at least four scenarios in which a person might need a guarantor mortgage. These might include if you want to purchase a property with the following:

A low income. Securing a guarantor could allow you to take out a larger loan, because lenders typically decide how much money to lend you based on your level of income.

A small deposit/no deposit. With a guarantor mortgage, you could very well borrow up to 100% of the home’s total value.

A bad credit score. Even with a bad credit score, a lender would be more likely to offer you a loan if you have a guarantor.

Little or no credit history. Even if you have never had a credit card, for instance, you can secure a home loan if you obtain a guarantor mortgage.

If you are undecided about whether to seek a guarantor mortgage, it is important to speak with an independent mortgage broker who can provide you with advice that is tailored to your specific situation.

How does a guarantor mortgage work?

If you obtain a guarantor mortgage, you essentially will be using the guarantor’s property as security. In other words, if neither you nor the guarantor can consistently make your mortgage repayments, the lender can forcibly sell the guarantor’s property. This arrangement lessens the risk for the lender because it ensures that they will not have to pay anything even if you fail to make your monthly mortgage payments.

The basics of a guarantor mortgage are as follows. Your guarantor must add his or her name to any legal documents and agree to make the mortgage repayments if you fail to, while not actually being on the title deeds of the home and not owning any share of the home. Your guarantor also must put up his or her own property as security, as mentioned above, so that if either of you fail to make the mortgage repayments, both of your properties could be at risk. There are also guarantor mortgages that use the guarantor’s savings instead of the guarantor’s property.

Types of guarantor mortgage

The types of guarantor mortgage currently offered by lenders are as follows:

Savings as security. The guarantor deposits funds into an account held by the bank and earns interest. Unless you miss a mortgage repayment, the guarantor will get these savings back. Usually, lenders hold the savings until they get the money from you or sell the property, therefore covering the shortfall between the loan value and the amount the home sells for.

Property as security. In this case, your guarantor’s property is used as security by the lender. The guarantor could potentially lose their home if there is a shortfall after repossessing and selling your home.

Family offset mortgages. The guarantor will deposit funds into a savings account that is connected to your mortgage, with the amount of the loan that you pay interest on offset by the amount in the savings, which might save you a significant amount of money. However, the savings will not earn interest and could be locked away for a significant amount of time. Lenders recoup funds the same way as with a savings-as-security mortgage in the even that you miss payments.

Family link mortgage. While you may get 90% of the home’s value as a mortgage, the other 10% is also a mortgage secured against the guarantor’s property, meaning that you both would have to repay 10% within the first five years. In this scenario, the guarantor is responsible only for that 10% if you default.

Is getting a guarantor mortgage a good idea?

Because a guarantor mortgage forms a strong financial obligation between parent and child, it is important to think carefully about whether this is a wise move for you. It is an emotive issue. After all, if you default, your parent is possibly putting his or her property or savings on the line.