If you’re a first-time buyer or struggling to get on the property ladder, you may have heard of guarantor mortgages. These types of loans can help potential borrowers secure a mortgage with the help of a guarantor, typically a family member or trusted friend. But what exactly is a guarantor mortgage and how does it work? In this article, we’ll delve into the details of guarantor mortgages and discuss their pros and cons.
What is a Guarantor Mortgage?
A guarantor mortgage is a type of mortgage that allows borrowers to apply for a larger loan than they would otherwise be eligible for. This is because the guarantor agrees to use their own assets (typically their home) as security for the mortgage. In other words, if the borrower is unable to make their mortgage payments, the guarantor will be responsible for covering the shortfall.
Definition and Purpose
The purpose of a guarantor mortgage is to help borrowers who may not have a large enough deposit or sufficient income to qualify for a mortgage on their own. By having a guarantor, lenders may be more willing to lend to borrowers who would otherwise be considered high-risk.
Guarantor mortgages are particularly popular among first-time buyers who may have limited savings or a lower income. This type of mortgage can also be useful for self-employed borrowers who may have difficulty proving their income to lenders.
It’s worth noting that a guarantor mortgage isn’t just for those who are struggling to get a mortgage. It can also be a useful option for those who want to borrow more than they would be able to on their own, for example, to buy a larger property or to fund home improvements.
Key Features of Guarantor Mortgages
The key features of guarantor mortgages include:
- The guarantor provides a guarantee for the loan, typically secured against their own property
- The guarantor must be a homeowner and have a good credit rating
- The guarantor’s income and outgoings will be taken into account when assessing affordability
- The guarantor will be liable for the mortgage if the borrower defaults on their payments
- The borrower is still responsible for making their mortgage payments as usual
It’s important to note that being a guarantor for a mortgage is a serious commitment. The guarantor must be willing and able to cover the mortgage payments if the borrower is unable to do so. Before agreeing to be a guarantor, it’s important to fully understand the risks involved and to seek independent legal and financial advice.
However, being a guarantor can also be a great way to help a loved one get onto the property ladder or to achieve their dream of owning their own home.
The Role of the Guarantor
As mentioned, the guarantor plays a crucial role in a guarantor mortgage. They not only provide security for the loan, but they also have a number of responsibilities and obligations to fulfill.
Responsibilities and Obligations
First and foremost, the guarantor is responsible for ensuring that the borrower meets their mortgage payments each month. If the borrower defaults on their payments, the guarantor will have to step in and make up the shortfall. The guarantor’s income and outgoings will also be taken into account when assessing affordability, so it’s vital that they have a good credit rating and can demonstrate that they have sufficient income to cover the mortgage payments if necessary.
Risks and Benefits for the Guarantor
While being a guarantor can be a great way to help family members or friends get on the property ladder, it’s important to understand the risks involved. If the borrower is unable to make their payments, the guarantor will be liable for the mortgage. This could result in the guarantor having to sell their own property to cover the debt. However, if the borrower makes their payments as agreed, the guarantor’s involvement will typically have no impact on their credit rating.
Eligibility Criteria for Guarantor Mortgages
In order to be eligible for a guarantor mortgage, both the borrower and the guarantor must meet certain criteria.
Borrower Requirements
The borrower will typically need to meet the following requirements:
- A good credit rating
- A stable income and employment history
- A deposit of at least 5% of the purchase price (although in some cases, no deposit may be required)
Guarantor Requirements
The guarantor will typically need to meet the following requirements:
- A good credit rating
- A property that they own outright or have a significant level of equity in
- A stable income and employment history
- The ability to cover the mortgage payments in the event that the borrower defaults
How to Apply for a Guarantor Mortgage
If you’re interested in applying for a guarantor mortgage, there are a few steps you’ll need to take.
Preparing Necessary Documents
You’ll need to provide proof of your income, employment history, and credit history. You will also need to provide details of the property you’re hoping to purchase.
Choosing the Right Lender
Not all mortgage lenders offer guarantor mortgages, so it’s important to do your research and find a lender that does.
The Application Process
The application process for a guarantor mortgage will typically involve a credit check, an affordability assessment, and a valuation of the property you’re hoping to purchase. The lender will also assess both the borrower and the guarantor’s ability to make the mortgage payments.
Pros and Cons of Guarantor Mortgages
Advantages for Borrowers
Some of the advantages of guarantor mortgages for borrowers include:
- The ability to borrow a larger amount than they would be able to on their own
- Easier access to mortgages for those with a less than perfect credit history
- No need for a large deposit – in some cases, no deposit may be required
Disadvantages for Borrowers
Some of the disadvantages of guarantor mortgages for borrowers include:
- The risk of putting a close family member or friend’s home at risk
- The potential for higher interest rates and fees compared to other types of mortgages
- The need to provide detailed financial information for both the borrower and the guarantor
Impact on Guarantors
For guarantors, the main advantage of a guarantor mortgage is the ability to help someone else get on the property ladder. However, the risks involved should not be overlooked. If the borrower defaults on their payments, the guarantor will be liable for the mortgage. This means that their own home could be at risk if they are unable to cover the debt.
Conclusion
Guarantor mortgages can be a great way for borrowers to secure a mortgage that they may not otherwise be eligible for. However, it’s important to understand the risks involved and to carefully consider whether this is the right option for you. If you’re considering a guarantor mortgage, make sure you do your research, compare lenders, and seek professional advice if necessary.