The Role of a Mortgage Guarantor
The Role of a Mortgage Guarantor
Guarantor mortgages can help first-time home buyers get on the property ladder.
A guarantor is defined by the financial guide Investopedia as ‘an individual who promises to pay a borrower’s debt in the event that the borrower defaults on their loan obligation’. Mortgages are large, secured loans, and some require guarantors. This is often the case with products aimed at first-time buyers, whose financial position may be strengthened by the presence of a guarantor, as we’ll explain.
If you want a guarantor mortgage, someone you know well needs to agree to settle the debt should you become unable to repay part or all of what you owe each month (for example, if you experience long-term unemployment). In other words, if life throws you a curveball, the loan will still be repaid and you won’t lose your home, thanks to your mortgage guarantor’s support.
A Close Relationship Is Crucial
For this legal agreement to work, the lender must feel satisfied that your mortgage guarantor has a good credit history and access to adequate funds in relation to the size of the loan. They must also be confident that you can afford the loan yourself and won’t actually need help unless something goes drastically wrong.
The lender is likely to want your guarantor to be under 75, a homeowner and closely related to you. Close ties are important: there needs to be plenty of trust between you and your mortgage guarantor. The Financial Ombudsman Service emphasises that borrower-guarantor relationships ‘can come under strain’ as there’s so much at stake (including guarantors’ credit ratings and collateral), so it’s essential they’re strong.
Guarantors Have Considerable Responsibility
A mortgage guarantor’s role clearly carries considerable responsibility. As The Times’ Money Mentor told a reader who was thinking about assuming this role, ‘it’s a good idea to seek independent legal and financial advice so you fully understand the implications’. In fact, many lenders insist potential guarantors do exactly that.
The mortgage won’t just be secured against the borrower’s property; the guarantor will have to use their home equity or savings as security too. (The latter option involves keeping cash equivalent to up to a fifth of the mortgaged property’s value in a ‘locked’ account, as consumer body Which? explains.) The guarantor needs sufficient funds to take on the borrower’s debt, if required, while still fulfilling their other financial obligations (which may include their own mortgage), subject to lenders approval
Depending on the terms of the agreement, the guarantor could be obliged to step in if relations between lender and borrower break down completely and the property is repossessed. If it sells for less than the outstanding loan amount, the guarantor may have to cover the shortfall (or some of it). But bear in mind that this is a worst-case scenario and guarantor mortgages are intended to reduce the risk of negative outcomes.
A Helping Hand for Loved Ones
Guarantor mortgages can be a sensible way for parents to help their less-affluent offspring become first-time buyers or move up the property ladder.
If you only have a small deposit – or no deposit – and/or a low income, a guarantor mortgage could be beneficial. (To give you an idea of where you stand, social change charity the Joseph Rowntree Foundation estimates that adults need an annual income of £25,500+ for an acceptable standard of living.) The presence of a parent or another person acting as guarantor may give you more financial ‘clout’ – you could get a better deal or borrow more. Indeed, guarantor mortgages for 100% of the property’s value aren’t unheard of.
If you have adverse credit or don’t have an extensive credit history, a guarantor mortgage could also be appropriate. Your guarantor’s solid financial track record may make lenders look more favourably on you.
Relieving the Guarantor of Their Responsibilities
Despite the legally-binding commitment they make to you and the lender, your mortgage guarantor won’t own part of your home. It’ll feel like yours alone.
What’s more, the lender may consider relieving the guarantor of their responsibilities when the initial mortgage term (often five years) ends, provided you’ve kept up with the repayments. You’ll have shown the lender you’re reliable and will be in a stronger financial position.
Guarantor Mortgages for Devon Homes
‘An independent mortgage broker can give you more in-depth advice on whether a guarantor mortgage is suitable for you,’ Which? remarks.
At The Mortgage Shop, Devon’s largest independent mortgage broker, we can offer you clear, impartial guarantor mortgages guidance whether you’re buying your first home or moving up the property ladder.
For independent advice about guarantor mortgages, contact us today.
Standard Health Warning & Regulatory Statement
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured against it. All loans subject to status. Ask for a personalised illustration. You may be required to pay a broker fee depending upon the type of mortgage recommended. Registered in England and Wales 3110231 – Registered Office: Sommerville House, 30 Southernhay East, Exeter, Devon EX1 1NS. The Mortgage Shop is a trading name of The Mortgage Shop (Exeter) Limited which is authorised and regulated by the Financial Conduct Authority. FRN 302305 Check that this mortgage will meet your needs if you want to move or sell your home or you want your family to inherit it. If you are in any doubt, seek independent advice.