As a result, many prospective homeowners have had to delay their aspirations of purchasing a property. However, alternative solutions exist, including government schemes and options like guarantor mortgages, which can provide a viable pathway to homeownership.
Understanding Guarantor Mortgages
A guarantor mortgage allows another individual, typically a family member, to act as a guarantor, pledging to cover the mortgage payments if the borrower is unable to do so. This arrangement reduces the risk for lenders, as the guarantor undergoes financial checks to ensure they are capable of meeting these obligations if required.
This type of mortgage is particularly beneficial for those who have struggled to secure a mortgage due to a poor credit history or a lack of sufficient credit history. The guarantor, who does not usually appear on the property deeds, signs legal documents confirming their responsibility to cover the mortgage payments if the homeowner defaults.
Guarantor mortgages are not widely available, and the number of lenders offering them has decreased, especially after the COVID-19 pandemic. However, a mortgage broker, particularly one with access to a broad range of products, may still be able to help find a suitable guarantor mortgage or an alternative solution that meets the buyer’s needs.
Types of Guarantor Mortgages
There are various types of guarantor mortgages, each with its unique structure and requirements:
Savings as Security
In this arrangement, the guarantor deposits a portion of their savings into a designated account to serve as collateral. This amount typically ranges between 5% and 20% of the property’s value and functions similarly to a deposit. Once a certain portion of the mortgage has been repaid, the guarantor can withdraw their funds. If the borrower misses any mortgage payments, the lender can access these savings to cover the shortfall. In some cases, the savings may earn interest, though usually at a lower rate than a standard savings account.
Property as Security
Alternatively, the guarantor can use their own property as security. This option involves significant risk, as the lender could potentially take legal action to repossess the guarantor’s property if the borrower fails to keep up with the mortgage payments.
Joint Mortgages and JBSP Mortgages
Another approach is to enter into a joint mortgage, where the property is co-owned by the borrower and the guarantor, who could be a parent, partner, or friend. This arrangement often makes it easier to secure a mortgage as it combines two incomes. However, if the guarantor already owns property, they may be liable for the additional stamp duty surcharge on second homes, which can be costly.
A Joint Borrower, Sole Proprietor (JBSP) mortgage is similar, but only the borrower’s name appears on the property deeds, avoiding the stamp duty surcharge for the guarantor.
Who Should Consider a Guarantor Mortgage?
Guarantor mortgages are designed for individuals who are unable to secure a mortgage on their own due to insufficient savings, poor credit history, low income, or a lack of credit history. The critical requirement is that they have someone willing and able to act as a guarantor, meeting the necessary financial criteria.
Typically, the guarantor is a parent assisting their child in purchasing a home, though other close relatives, such as grandparents, may also fill this role. The guarantor must have a good credit rating and be able to provide the required security, whether through savings or property equity.
Benefits for First-Time Buyers
For first-time buyers, obtaining a mortgage can be particularly challenging, especially as many lenders now require a minimum deposit of 5%. A guarantor mortgage offers a solution for those who lack the necessary deposit or credit history, providing a way to purchase their first property without sharing ownership with a housing association, as is the case with some government schemes.
Responsibilities and Risks for Guarantors
In the first instance, the borrower is responsible for making the mortgage payments. However, if they are unable to do so, the guarantor is legally obligated to step in. Should the guarantor also be unable to cover the payments, the assets they used as security, such as savings or property, could be at risk.
Additionally, even if the borrower makes all payments on time, the guarantor’s credit record is linked to theirs, meaning that any financial missteps by the borrower could impact the guarantor’s credit rating.
Costs Involved in Guarantor Mortgages
Guarantor mortgages typically come with higher interest rates compared to standard mortgages, and fewer deals are available. This could also result in higher arrangement fees, which might have been avoidable with more options on the market. If the guarantor has to pay the second property stamp duty surcharge, the costs increase further, with an additional 3% surcharge on top of the standard Stamp Duty Land Tax.
Alternatives to Guarantor Mortgages
If a guarantor mortgage isn’t an option, other government schemes like Shared Ownership may still make homeownership possible. Shared Ownership allows buyers to purchase a percentage of a property, usually between 25% and 75%, reducing the mortgage amount and deposit required.
Conclusion
In today’s stricter lending environment, exacerbated by the economic impact of the COVID-19 pandemic, many individuals find it difficult to secure a mortgage without meeting stringent criteria. For those with supportive family members willing to act as guarantors, a guarantor mortgage can provide a pathway to homeownership. However, it’s essential to fully understand the responsibilities and risks involved.
If you’re considering a guarantor mortgage or exploring other mortgage options, consulting a broker can help you navigate the complex landscape and find the best solution for your financial situation.
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