More and more people are turning to this route…
An increasing volume of people are turning to a guarantor on their mortgage in order to be eligible, according to Chaim Geller, financial adviser and founder of Help Me Build Credit.
“However, in order for a guarantor to work effectively and without heartache, it needs to be done properly,” Geller said.
What does a guarantor need to do?
A guarantor will typically need to offer their home or savings as security against the loan in order for the lender to release the funds. Some guarantor mortgages will allow the consumer to borrow 100% of the property's value by using the guarantor’s collateral in place of a deposit.
To be eligible, the guarantor, which is usually the parent of the child attempting to get a mortgage, will usually need to own a high proportion of the property outright. In a worst-case scenario, if the lender had to repossess and sell the property for less than the amount remaining on the mortgage, the guarantor could stand to lose their home.
“I like to break up guarantor responsibilities as follows. The child is the owner of the loan and makes sure their mortgage gets paid in a timely manner,” Geller said. However, he added that the guarantor parent is also responsible for making sure the loan gets paid, but only if the child defaults on the loan.
So if the child is late on a payment or misses a payment, the parent will be required to step in and take care of the payment, or risk defaulting.
One of the most common mortgage types for guarantor mortgages is joint borrower sole proprietor (JBSP) - this means both the parent’s and child’s names are on the mortgage. This mortgage type allows for the parent to use their income and savings to boost the child’s mortgage chances.
However, there is a pitfall - if the parent already owns their own home, they will need to pay the second property stamp duty surcharge.
Read more: JBSP mortgages most searched for term
Who stands to benefit from a guarantor mortgage?
Guarantor mortgages are typically aimed at consumers with a low income, a small or non-existent deposit, a bad credit score, and little to no credit history. As a result of the customer type, guarantor mortgages often come with a higher rate than a standard mortgage product.
In order to assist borrowers who may otherwise struggle to get on to the housing ladder, some lenders have begun offering JBSP mortgages at higher loan-to-value (LTV) tiers.
What precautions should a guarantor take?
Since the guarantor is responsible for making mortgage payments if the primary defaults on the loan, Geller advises the would-be guarantor to check the financial eligibility of their child to ensure they can afford the mortgage.
“Another caution I recommend setting in place is to get three months’ worth of mortgage as escrow from your child upfront to use if the child misses a payment,” he added.
In addition, Geller said he recommends asking the bank to send the mortgage statements to both parties, so that everyone involved is always aware of the financial situation regarding the property. The bank will typically only send the statements to the primary on the mortgage unless the guarantor asks for it too.
Geller went on to explain that it is also important that the child looks to refinance when they become eligible for the loan, so that the guarantor can take their name off the loan faster than the full lifetime of the mortgage.
Typically, a guarantor can be released from the mortgage agreement once the loan to value level on the property has decreased to around 80%.
Although the guarantor cannot touch the allocated savings during this time, the amount can usually accrue interest on their behalf.
“However, when discussing becoming a guarantor, I always like to say that if you feel you are unable to be a guarantor, just say ‘no’,” Geller concluded.