If your dream of owning a home is evading you because you have a low income, no deposit or a bad credit score, one solution is to apply for a mortgage with a guarantor. Here, we’ll explain who can be your guarantor, how a guarantor mortgage works and whether you can borrow more on a mortgage when you have a guarantor helping you.
What is a guarantor mortgage?
A guarantor mortgage is an arrangement where someone takes on the legal responsibility to make your mortgage payments if you’re unable to make them. Although they are guaranteeing your mortgage payments, they’re not named on the property deeds. This allows you to buy a property when you’d otherwise struggle to while benefitting from full ownership of it.
Who can be your guarantor?
Generally, lenders prefer your guarantor to be an immediate relative, such as a parent, grandparent or sibling. Some lenders accept other family members, a spouse with a separate bank account or a close friend. Your guarantor needs to be a homeowner or have substantial savings and a strong credit rating.
What does your guarantor need to provide?
Lenders have different criteria for guarantors but require some form of security and also check their creditworthiness.
Security for the mortgage
Your guarantor needs to provide some form of security for the lender in case you default on the mortgage. This can either be a property they own, against which the lender will place a charge, or their savings.
- Property: If your guarantor already has a mortgage on their property, the lender may stipulate that they have a certain level of equity in it. For example, a minimum of 30%. As they’re still repaying their mortgage, your guarantor needs to provide evidence that they can cover their mortgage payments as well as yours. Some lenders only accept a guarantor who has completely repaid their mortgage.
- Savings: If your guarantor has adequate savings, these can be held in an account by the lender. The savings needed are usually between 5% and 20% of the property’s value. They are held for a set term, such as 3 to 5 years, or until a certain amount of the mortgage loan has been paid off. The savings earn interest during this time. Once the set term has finished or the specified loan amount has been repaid, the savings are returned to your guarantor along with the interest.
A good credit rating
A strong credit score shows the lender that your guarantor is reliable when it comes to managing their finances. If you have a low credit rating, a poor one or a lack of credit score altogether, having a guarantor with a good credit rating boosts your chances of being approved for a mortgage.
Can you borrow more with a guarantor?
Yes, with a guarantor for your mortgage, you can borrow more from the lender than if applying for a mortgage on your own. Your guarantor’s income is assessed as well as yours, increasing the amount that the lender is prepared to offer as a loan. This is why a guarantor mortgage is an ideal solution if you have a low income or no income. Some lenders even offer 100% guarantor mortgages, which means you don’t need to have saved a deposit before you can buy a home.
You may have no problem securing a mortgage on your own but have found a property that’s out of your price range. In this case, having a guarantor increases your borrowing potential, allowing you to buy the property you’ve had your sights on.
What risks are there for your guarantor?
There are risks to consider for the person offering to be your guarantor. If they agree to use their property as security, there’s a risk that the lender may need to repossess it should you default on the mortgage payments.
If their savings are used as security and you have missed mortgage payments, the lender may continue to hold the savings until such time as you have repaid what’s owed. Alternatively, if your property has to be repossessed and the sale proceeds are not high enough to repay the outstanding loan, the savings will be used to cover the shortfall.
Not only does your guarantor risk their property or savings but their credit rating will also be negatively affected. Being a guarantor, therefore, is a considerable commitment involving significant risk. As such, lenders expect whoever has agreed to be your guarantor to have taken independent legal advice first.
Turn your dream of home ownership into reality with a guarantor mortgage
If you think a guarantor mortgage may be the solution you’re looking for, get in touch with our mortgage brokers on 01322 907 000 for impartial advice. They can check your circumstances and those of your guarantor to ascertain how much you can borrow. With unrestricted access to lenders, they can search for the best deals to meet your needs and negotiate on your behalf.
Before proceeding with your application, they will ensure that both you and your guarantor are fully aware of what this type of mortgage entails. They will also advise you of any alternatives that they feel may be better suited to your circumstances. For example, an offset mortgage or a family springboard mortgage. That way, you can make an informed decision on which mortgage route to take.