Have you ever thought: what is a guarantor mortgage and how do they work? A guarantor mortgage is a mortgage secured by a third party. In many cases, this is a parent or a close family member. The guarantor has a legal obligation to repay your lender, if you miss any mortgage payments.
Your home may be repossessed if you do not keep up repayments on your mortgage.
What is a guarantor?
A guarantor will secure the payment of the mortgage and its repayments on behalf of the borrower, usually their child. The child takes out the mortgage, but the parent gives a guarantee that they will make the guarantor mortgage repayments if the child falls behind on their payments.
How does a guarantor mortgage work?
Having a guarantor mortgage is typically used for first-time buyers who cannot get a mortgage on their own. They give mortgage lenders an extra level of assurance that a mortgage will be repaid.
They can also sometimes be used to lend to an applicant a lender might otherwise turn down. Guarantor mortgages can be suitable for people who have:
- a small deposit
- a low income in relation to the mortgage amount
- a poor credit score or little credit history
How to guarantee a mortgage
There are several ways to secure a guarantor mortgage.
In most cases, the mortgage lender will place a charge against the guarantor’s property. To do this, the guarantor will need to have paid off their mortgage or have sufficient equity in their own property. Having a charge on the guarantor’s property means the guarantor could lose their home. In the event that the child’s guarantor mortgage is not paid as agreed.
With other guarantor mortgages, the guarantor can put down cash in a savings account linked to the borrower’s mortgage. This arrangement is often known as a ‘family offset mortgage’. The money will need be kept in the savings account until a certain proportion of the mortgage has been paid off. Or until the amount owed on the mortgage falls below a certain proportion of the property’s value.
Parents can also help their child buy a home by buying a property jointly. This means the parent’s income, as well as the child’s, will be taken into account when calculating mortgage affordability. With a joint mortgage, both the parent and child’s names are on the mortgage and the property deeds.
A ‘joint borrower sole proprietor (JBSP)’ mortgage works slightly differently. Both the parent and child are named on the mortgage. But, only the child’s name is on the property’s deeds. This means the parent can avoid the stamp duty surcharge payable on second homes.
Who can be a guarantor?
To be a guarantor, the parent or family member usually needs to:
- be a homeowner
- have sufficient equity in their property
- earn a decent income
- have a good credit history
What happens if the borrower misses a repayment on a guarantor mortgage?
If the borrower misses a payment, the guarantor will be asked to pay, if the payments aren’t bought up to date by either party in sufficient time. The lender could ultimately repossess the guarantor’s home or take cash from the savings account linked to the mortgage.
For this reason, it’s important that anyone considering being a guarantor take independent legal advice before going ahead. Some lenders will insist on this.
Guarantor repossessions happen in the worst-case scenario usually after other options have been explored. You should always speak to your lender if you fall into difficulty with your mortgage.
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Your home may be repossessed if you do not keep up repayments on your mortgage.
Last Updated: December 16th, 2022
