Guarantor mortgages in the UK can be a lifeline for those struggling to get on the property ladder. By sharing the risk with a guarantor, you may be eligible for a mortgage that would otherwise be out of reach. But is a guarantor mortgage the right choice for you? And what exactly does it entail? Guarantor mortgages should not be considered without fully understanding the implications, so let’s look into the ins and outs of these products below. In this guide, we explain everything you need to know about guarantor mortgages, including how they work, what the different types are, the benefits, drawbacks and risks, and how to choose a guarantor.
What is a Guarantor Mortgage?
A guarantor mortgage is a type of mortgage that allows someone with limited financial resources to qualify for a loan by sharing the risk with a guarantor. This enables people who wouldn’t otherwise be able to get on the property ladder or upsize to do so.
How Do Guarantor Mortgages Work?
The key feature that differentiates these products from regular mortgages is the involvement of a guarantor. The guarantor will be legally liable for the mortgage if the borrower is unable to keep up with repayments, thereby reducing the risk to the lender. This may allow the borrower to qualify for a mortgage or be able to borrow more than they would otherwise.
Typically, the guarantor will be a parent, grandparent or other close relative, but occasionally close friends can also take on the role. Whoever it is, they will need to be in a strong financial position and it’s important they understand the implications involved.
There are different types of guarantor mortgages, some that use the guarantor’s savings as security and others that use their property. We’ll take a deeper look at the different types of guarantor mortgages a bit later.
Will My Guarantor Own the Property?
In most cases, lenders will not require the guarantor to be on the deeds of the property. In other words, the borrower will fully own their home and there will be no stamp duty implications for the guarantor. The guarantor will be party to the mortgage, however, and therefore it’s recommended that the guarantor seeks independent legal advice before committing.
Who Can Get a Guarantor Mortgage?
Guarantor mortgages are an option for borrowers who might face difficulties qualifying for a regular mortgage on their own. Typically this is for one of the three following reasons:
- Limited Deposit. If you have a small deposit saved for a down payment (or none at all), a guarantor mortgage could bridge the gap and help you get on the property ladder.
- Lower Income. If you have a lower income, a guarantor may be able to strengthen your application and allow you to borrow more than you would be able to otherwise.
- Poor Credit History. A history of missed payments or credit issues can make it difficult to qualify for a mortgage. Having a guarantor with a strong credit score can improve your chances of approval.
How Much Can I Borrow With a Guarantor Mortgage?
In terms of loan-to-value (LTV), it’s possible to borrow up to 100% of the property’s value, such as with a Family Springboard Mortgage, but most lenders will lend at a maximum of 90-95% LTV.
Having said that, the exact amount you’ll be able to borrow with a guarantor mortgage will depend on several factors. Let’s have a look at some of these factors below.
- Guarantor’s Financial Situation. This is generally the most significant influence. Lenders will look at your guarantor’s overall financial situation in detail. Then they will typically use a maximum income multiple of around 4.5 times your guarantor’s income to work out the amount you can borrow, but this could be higher if your guarantor is in a particularly strong financial position.
- Your Financial Situation. While the guarantor’s income is usually more important for this type of mortgage, lenders will also consider your own financial situation. This includes your income, employment status, and existing debts. A higher income or lower outgoings on your part could potentially allow for a larger loan amount.
- Property Value. As mentioned, most lenders offering guarantor mortgages have a maximum LTV ratio, of 90-95%. This means the maximum loan amount can’t exceed 90-95% of the property’s value. However, in some cases, such as with a Family Springboard Mortgage, you may be able to borrow up to 100% of the property’s value.
Bear in mind that each lender has their own criteria when it comes to loan amounts, so it’s important you speak to a mortgage broker to compare available deals. Our advisors will look at your and your guarantor’s financial situation and figure out which lender is most suitable for you and how much you’ll be able to borrow.
What are the Benefits and Drawbacks of a Guarantor Mortgage?
A guarantor mortgage can certainly be life-changing for the borrower, but perhaps more than any other mortgage product, they also have serious implications for you and your guarantor if things don’t go as smoothly as planned. It’s important that all parties understand and accept the risks involved before moving forward with a guarantor mortgage. We’ve outlined the benefits, drawbacks and risks below, but please be sure to speak to a mortgage broker who can explain these to you in more detail.
Benefits of a Guarantor Mortgage
- Get on the Property Ladder. This can be a game-changer for First Time Buyers who are struggling to save a large deposit or have a limited income. The guarantor’s backing increases your chances of securing a mortgage, potentially allowing you to get on the property ladder sooner than you would be able to otherwise.
- Potentially Borrow More. Similar to the above point, having a guarantor on your application might allow you to borrow more than you would be able to on your own. Therefore, families often use guarantor mortgages to get higher up the property ladder.
- Potentially Lower Rates. If your guarantor is in a strong financial position, you might qualify for more competitive mortgage rates as your risk profile will have improved, saving you money in the long run.
- Build Credit History. Getting a mortgage and keeping up with your repayments might help improve your credit score, which could put you in a better financial position moving forward.
Drawbacks & Risks of a Guarantor Mortgage
- Finding a Guarantor. You’ll need to find a suitable guarantor – someone with the required finances and credit history who is willing to take on the responsibility of guaranteeing your loan.
- Guarantor’s Risk. Your guarantor will be legally responsible for repayments if you can’t meet them. This could impact their own financial situation and credit score if they have to cover your payments.
- Strain on Relationships. Any defaults on your mortgage could cause financial difficulties for your guarantor, which could potentially damage your relationship with them.
- Risk of Death. If your guarantor was to pass away during the mortgage term, you may be required to find a new guarantor or use some of the guarantor’s estate to pay off the mortgage (if this is possible).
- Shorter Term. For some products, your mortgage term may be limited by the age of your guarantor. However, we recommend speaking to a mortgage advisor as there are schemes available to combat this.
- Potentially Higher Costs. Guarantor mortgages might come with higher arrangement fees or interest rates compared to standard mortgages.
What Types of Guarantor Mortgage Are There?
In the UK, guarantor mortgages generally fall into two main categories based on whether the guarantor provides savings or property as security to the lender. Let’s have a look at these two options in more detail.
Savings as Security Guarantor Mortgage
With this type of guarantor mortgage, the guarantor deposits a lump sum of money (typically between 5% and 20% of the property value) into a dedicated savings account chosen by the lender. This acts as a safety net for the lender in case you, the borrower, fall behind on your repayments. The guarantor typically can’t access this money until you have met certain criteria, for example, reaching a specific equity level in the property (through repayments) or after five years. Providing you keep up the repayments, your guarantor will also accrue interest on their savings. The main benefit of this option is that the guarantor’s property is not at risk, however, it does mean that a part of their savings are tied up for a period, potentially impacting their financial flexibility. There is also the risk of losing their savings if you’re unable to keep up with your repayments. One example of a ‘savings as security guarantor mortgage’ is the Family Springboard Mortgage, which you can learn more about by reading our guide, ‘Family Springboard Mortgage Explained – How to Get a Mortgage With Help From Your Family’.
Property as Security Guarantor Mortgage
With this type of guarantor mortgage, the guarantor puts their own property up as collateral. This means that if you, the borrower, default on the mortgage and your guarantor is also unable to make the repayments, the lender could repossess the guarantor’s property to recover the debt. The main benefit of this type of guarantor mortgage is that it offers a stronger safety net to the lender, which could unlock better deals. However, this option carries a significant risk for the guarantor as they could lose their home if both parties are unable to cover the repayments.
Family Offset Mortgage
Another related option is a Family Offset Mortgage, which is where a close family member opens a savings account that is linked to your mortgage. The funds in this account are used to offset your mortgage interest, thereby reducing your monthly repayments. These work in a similar way to regular offset mortgages, so to learn more about these products please read our guide, ‘Offset Mortgages – Could You Save Money on Your Mortgage?’
Who Can Be a Guarantor and What Are They Responsible For?
Typically, guarantors will be close family members like parents, grandparents or less commonly, siblings. However, some lenders may accept stepparents, long-term partners (with separate finances) or even close friends. To satisfy a lender, your guarantor will need to be in a strong financial position and have a strong and stable relationship with you.
Some lenders might also require the guarantor to be a homeowner with equity in their property, especially if the property will be used as security.
Your guarantor will be responsible for your mortgage repayments if you’re unable to make them. This could mean that they lose some of their savings or even their property in extreme cases, so it’s important they fully understand the implications of being a guarantor before signing the contract.
Is a Guarantor Mortgage Right for Me and How Do I Get One?
A guarantor mortgage may be right for you if you want to get on the property ladder but aren’t in a suitable financial position to get a regular mortgage. This might be because you only have a small deposit, low income or a poor credit history. You’ll need someone willing to act as a guarantor who meets the lender’s criteria in terms of financial position, creditworthiness and relationship to you.
It’s important you and your guarantor understand and are comfortable with the responsibilities and risks for both parties. You may also want to explore other options like saving a larger deposit, improving your credit score, looking for a more affordable property, or checking available Help to Buy Schemes before committing to a guarantor mortgage. We recommend speaking to one of our friendly advisors who’ll be able to assess your situation and see what options are available to you, including guarantor mortgage deals from across the market.
What Other Options Are There to Help Me Get a Mortgage?
There are various Help to Buy Schemes available that may be better suited if you don’t have a family member who is willing or able to act as a guarantor. You can learn more about the Help to Buy Schemes currently on offer here, or by visiting one of the links below.
- The 95% Mortgage Guarantee Scheme allows mortgage lenders to offer 95% loan-to-value mortgages for properties that are not new builds, so you can purchase a home with only a 5% to 9% deposit. To learn more about this scheme, please read our guide, ‘95% Mortgage Guarantee Scheme Explained’.
- The Deposit Unlock Scheme also offers 95% loan-to-value mortgages but for new build properties only, so you can purchase a home with only a 5% to 9% deposit. To learn more about this scheme, please read our guide, ‘Deposit Unlock Scheme Explained’.
- The Shared Ownership Scheme allows you to buy a share of a home and rent the remaining share. To learn more about this scheme, please read our guide, ‘Shared Ownership Scheme Explained’.
The Bottom Line
A guarantor mortgage can open the doors of homeownership to those who may otherwise be unable to get on the property ladder. If you are struggling to save a suitable deposit, or your income or creditworthiness makes you ineligible for a regular mortgage, you may want to consider adding a guarantor to your application. This will typically be a parent or grandparent but some lenders except other family members and close friends. Your guarantor will need to be in a strong financial position with a good credit score, and it’s important he or she fully understands the risks involved before agreeing to the role. Speaking to a mortgage broker who understands guarantor mortgages and other related options should be your first port of call, so please book a chat with one of our friendly advisors here.
At Michael Usher Mortgage Services, we’ve been helping our local community for over 30 years! We’re not affiliated with any particular lender, so we can access a comprehensive range of mortgages from across the market to find a deal that suits your needs. We’ll guide you through the process and liaise with your lender, estate agent and solicitor to ensure your application goes as smoothly as possible, and we can also help to protect your mortgage with our FREE Insurance Service.
Talk to one of our friendly mortgage advisors for free to get going quickly. Our head office is on Frimley High Street, but we can also help you remotely via phone or video call if you’d prefer. We look forward to chatting with you!
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Your home may be repossessed if you do not keep up repayments on your mortgage. There may be a fee for mortgage advice. The precise amount will depend on your circumstances but will be agreed with you before proceeding.
