Wondering what guarantor mortgages are and whether one could help you own a home? Finding the best mortgage deal can be tricky. Add to that a small deposit and/or low salary, and securing a mortgage can seem out of reach. However, you have helpful family or friends that can provide a financial safety net for you while you're getting on the property ladder, this type of mortgage could well pave the way for you to becoming a home owner.
Guarantor mortgages are currently the only viable form of 100% mortgage lending. When you read about 100% mortgages, you are essentially reading about guarantor mortgages. We explain how they work and whether you can/should be looking into one.
It may be that, after getting the lowdown, you and your family jointly decide that help towards a deposit is a better option, even if it may take longer. A higher deposit will mean a much better chance of getting a mortgage on the property you want. Use the online comparison tool below, brought to you in association with online mortgage experts Habito, and find the best mortgage to suit your circumstances and needs.
For more help if you are buying your first home, read our guide to mortgages for first-time buyers.
What is a guarantor mortgage?
A guarantor mortgage is a type of mortgage where a third party, usually the buyer’s parents or grandparents, commits to making the repayments on the mortgage if the buyer defaults. There are several ways in which the guarantor will secure this commitment, including holding a pre-agreed sum in a separate savings account linked to the mortgage, or using their own property as the financial guarantee. One thing it’s important to understand is that the buyer’s parents do not make the repayments, or make an upfront contribution to the deposit. A guarantor mortgage is, therefore, not the same as a joint borrower, sole proprietor mortgage.
Who is a guarantor mortgage suitable for?
First-time buyers, generally speaking, although people who are upsizing to a property they wouldn’t be able to afford on their current salaries may be eligible for some guarantor mortgage products. This type of mortgage can also help those with a low credit score, or people who don’t have one. Basically, if you want to own a house, but your financial circumstances are tricky and you are likely to be turned down for a mortgage, a guarantor mortgage could be a solution.
The guarantor mortgage is exclusively for buyers intending to live in the property themselves; a guarantor mortgage can’t be used as a buy to let mortgage.
Is a guarantor mortgage the same as a 100% mortgage?
In many cases, yes, which makes this a good alternative to government schemes such as Help to Buy. If you have nothing at all saved up for a deposit, and relatives who are willing to help out by acting as guarantors, you may be able to secure a 100 per cent loan to value (LTV) ratio, which is, essentially, a 100% mortgage. Not all lenders will do this: some will still want a deposit, even with a guarantor.
Who can be a guarantor on a mortgage?
A guarantor will need to satisfy the lender according to three criteria: their earnings, their home ownership status, and a high credit score. Typically, to be a guarantor, a person will need to own their own home, and most lenders will want to see that they own at least 30% of it. So, if your parents have only just bought their current house, they may not qualify.
Family offset mortgages and family deposit mortgages
A family offset mortgage uses a guarantor’s savings in order to offset – or reduce – the total amount of the loan on the property. This does not mean that your parents would lose their savings – once you’ve made the repayments to cover for the amount used to offset the loan, the money will be returned to the helper in full. In some cases, it’s also possible to hold the amount in a savings account, although the interest rates will not be great.
Currently, the most prominent family offset mortgage products are offered by Halifax and Barclays. The Halifax Family Boost mortgage and the Barclays Family Springboard mortgage are very similar; the Halifax mortgage offers a slightly better rate on savings (2.5 per cent), although the savings account comes at a monthly fee. The Barclays mortgage offers the savings account for free, but the money has to be held in the account for five years (as opposed to three for Halifax), and the interest rate is a slightly lower 2.25 per cent.
A family deposit mortgage refers to a home owner borrowing against part of the equity of their existing home and gifting that borrowing as a deposit towards the first-time buyer’'s home. Some lenders will only allow mortgage-free properties to be used for this form of gifting, while others will allow the additional borrowing to be made against a property with an existing mortgage.
Guarantor mortgage: the pros
A guarantor mortgage is a good option for first-time buyers who don’t have a deposit and whose parents are willing to help out – while not being able to gift a lump cash sum towards a deposit. If you are steadily employed and confident in your ability to make the mortgage repayments, it can be relatively low risk for everyone involved. The parents don’t even have to be on the house deeds, which will help avoid costly legal fees to remove their names in the future.
Guarantor mortgage: the cons
As with all other types of mortgage where more people than the home owners are involved, things could get tricky for the guarantor if the home owner were to miss the repayments. While many lenders will try to work out a reasonable solution – by giving an extension, for example – in the very worst case scenario, the guarantor stands to lose their savings, or worse, their home. For that reason, lenders who offer this type of mortgage will require all parties to participate in a legal consultation prior to taking it on.
Read more about how to stop house repossession in our guide.
Regardless of what mortgage you decide to go with in the end, have a play around with this useful tool from Habito first. It can give you a good idea of how much you could borrow on your current salary.