Guarantor Mortgages: What Are They and How Do They Work?
A guarantor mortgage can help applicants who are unable to secure a mortgage on their own, perhaps because they have bad credit. There are various pros and cons of guarantor mortgages but a guarantor should remember they will be liable should the applicant default on their repayments.
A guarantor mortgage works slightly differently to a regular mortgage, where a lender determines what they are willing to lend you based on your finances. This can be quite limiting for people who are trying to buy a property alone, earn less, or who have an imperfect credit history, and is where getting a mortgage with a guarantor can help.
What is a guarantor mortgage?
With a guarantor mortgage you have someone – your guarantor – who promises to cover your mortgage repayments if you don’t make them, and who your lender can pursue for any money you owe.
By taking into account your guarantor’s finances, a guarantor mortgage may allow you to borrow more than if you were taking out a mortgage alone. However, the guarantor won’t own any of the property itself.
Some guarantor mortgages don’t even require a deposit – these are known as 100% mortgages.
» COMPARE: 100% mortgages
How much can you borrow with a guarantor mortgage?
A guarantor mortgage can mean that you can borrow a larger amount than if you borrow alone. That’s because both your finances and those of your guarantor are included when the lender calculates what it thinks you can afford.
Lenders will go through your bank statements, and those of your guarantor, to establish what you can afford to repay. This won’t just be based on current interest rates, but also what you might be able to repay each month should rates rise.
Lenders also have their own maximum loan caps, which cover the absolute largest home loan they will offer to borrowers. These vary between lenders though.
Who can be a guarantor?
Individual lenders may have different rules covering who they will accept as a guarantor on your mortgage.
It’s not unusual for lenders to require the guarantor to be a family member – as with a parent guarantor mortgage – because of the assumption of a strong relationship between the borrower (the child) and the guarantor (the parents).
A guarantor will also need to be in a decent financial position in their own right, have a good credit history, and be a homeowner. Some lenders may require guarantors to own their own home outright, while others may settle for a guarantor to have a certain amount of equity in their property.
Pros of a guarantor mortgage
The main feature of a guarantor mortgage is that it allows you to borrow more than you could if you were borrowing on your own.
Some borrowers may not be able to get a large enough mortgage to purchase a home if they borrowed alone, but a guarantor mortgage may mean they could get on the housing ladder.
Guarantor mortgages can also make a big difference to those with black marks on their credit history. These issues can make it difficult to obtain a mortgage on your own, but as the lender has the peace of mind that a guarantor can cover repayments if you can’t, it may be more likely to approve your application.
» COMPARE: Mortgage deals for people with bad credit
Cons of a guarantor mortgage
A big downside to a guarantor mortgage is that you need to find someone willing to act as a guarantor, and whose own finances are in a sufficiently strong position that it will make a difference to the amount you can borrow.
Having your finances linked to a loved one in this way can also cause tensions, especially if either party has concerns about your ability to keep up with repayments.
Finding a guarantor mortgage isn’t always easy. These mortgages have always been something of a niche product, with only a few lenders offering them, and that level of choice has fallen in recent years. This means you may not be able to get one, even if you have someone willing to act as a guarantor.
Historically, interest rates on guarantor mortgages have also been higher than those offered on regular mortgages. It’s all about risk – a guarantor mortgage is a more risky prospect for a mortgage lender, so lenders will want to levy a higher interest rate to account for that risk. That means that your monthly repayments will be higher.
» COMPARE: Mortgage rates and deals
Alternatives to guarantor mortgages
While guarantor mortgages are becoming less common, a similar form of mortgage has grown in popularity – the joint borrower sole proprietor mortgage.
As the name suggests, while the mortgage is taken out by at least two people, only one of those borrowers actually lives in the property as the owner. For example, a first-time buyer might take one out with their parents in order to purchase their first home.
As with a guarantor mortgage, the non-resident borrower’s finances are included when establishing what the lender will offer, but they aren’t named on the property deeds.
With this type of mortgage, the non-resident is considered a borrower in their own right rather than merely a guarantor, but in practice they work in much the same way as a guarantor.
Taking out a joint mortgage is another potential alternative but involves all parties having a legal stake in the property and being named on the deeds.
» MORE: How a joint mortgage works
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John Fitzsimons has been writing about finance since 2007. He is the former editor of Mortgage Solutions and loveMONEY and his work has appeared in The Sunday Times, The Mirror, The Sun and Forbes. Read more